Are Low Interest Rates Good?

Unless you live in a cave, you are likely aware that the Federal Reserve Board (Fed) continues to lower short-term interest rates. This is good if you are invested in stocks. The Fed does this with the intention of boosting consumer spending thereby increasing corporate profits. This is called loosening the money supply which helps a slowing economy in several ways. First, it makes the cost of borrowing money less expensive. For some, this makes it enticing to buy things. For others, it frees up monthly cash outflow toward debt interest so those dollars may be used for spending. However, the primary goal with the most recent interest rate cuts is to help those with either high or variable rate mortgages or home loans so they are at a lower risk for foreclosure. It gives those homeowners the opportunity to refinance their current loans at lower rates which may lower the monthly payment. Or it may help those with variable rates refinance into a more comfortable fixed term loan. However, keep in mind that just because the Fed lowers short-term rates, it doesn’t mean that long term loan rates will drop right away. In fact, when the Fed did their surprise cut in February, mortgage rates actually climbed higher over the following weeks. It’s likely that rates will stay low for a while so there may be better opportunities later this spring or early summer to refinance your loans. However, as of the writing of this article, the 30-year fixed mortgage national average is 5.75% so now is great time to start shopping around for refinancing possibilities.

All of that is good for the markets and economy but not everyone is happy with lower interest rates. The flip side is if you are using the income from your savings, then you have likely felt a noticeable pay cut the past few months. Although it takes a while for the trickle down effect to get to long-term rates, short-term savings are hit hard almost immediately. In fact savings accounts are dropping to about 1% and certificates of deposit are not yielding much more. 2-year treasuries are only yielding 1.50%, 5-year treasuries are yielding 2.38% and 10-year treasuries are yielding a mere 3.58%. In addition, many companies (particularly bank stocks) are lowering their dividends which also effects income to shareholders. So although the market cheers when interest rates go down, many people will suffer negative consequences.

Because interest rates, the economy, the stock market and the real estate market are all very cyclical, we must accept these changes as they come about. The Federal Reserve Board’s main objective is to keep inflation in check without stunting economic growth. So whether you prefer lower interest rates or not, some of us will always benefit from the reduction while others will pay the consequences. Keep in mind that neither very low nor very high interest rates are good. Hopefully the economy will be able to continue to grow at a reasonable pace without dramatic changes in rates. As we go through these changes in the cycles, we must be patient as nothing lasts forever.