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Samuel Adams – Guest Contributor; Interest and You

July 29, 2014

Tonight, with great enthusiasm, I welcome a guest contributor to A Fresh Pair of Eyes. Samuel E Adams is someone who shares my passion for personal finance, finance in general, financial literacy, and bringing actionable information to everyone. A graduate of Lincoln University, and leader of several business-oriented groups while in college, Sam has continued his work after graduation. While also working full-time, Sam has worked diligently to assist people with their financial goals with the following motto — DLI “Dream big, Live actively, and Inspire others”

I look forward to working with Sam on other projects in the future!

The activity of interest rates over the last several years, since the financial crisis, has been nothing short of puzzling for head-scratching investors, market analysts, and people like you and me. By any normal historical standards, interest rates should be rising. Job growth is on the rise, the stock market is at all-time highs, as is economic growth (excluding the impact of the polar vortex), and yet interest rates remain stubbornly low.

In some instances, interest rates have actually fallen.

Let’s look at some of the ways that interest rates, and their activity during the last 5-year period, impact both corporate America and your personal finances.

1. Historical norms
2. Inflation premium.
3. Federal Reserve policy
4. Economic growth.

1. Historical norms. History is valuable to economists because it represents the boundaries of experience and economic activity. Take 30-year mortgage rates, for example. In December 2008, they dropped below any previous 30-year mortgage rates on record, and have since stayed in that uncharted territory for five and a half years — and counting. This is in spite of rising stock market values, corporate earnings, and even home prices.
2. Inflation premium. Interest rates generally beat inflation — otherwise individuals and financial institutions would be reluctant to lend money and make loans. So, for example, the average yield on one-year Treasury bonds has beaten the average inflation rate in 38 of the past 50 years. Basically, this is how banks and investors make money, in more normal conditions, even with relatively low-risk investments.
3. Federal Reserve policy. In November 2010, the Federal Reserve began an extraordinary program of long-term bond purchases designed to drive mortgage rates down. This appears to have been instrumental in helping mortgage rates achieve record lows. While mortgage and interest rates remain low, however, lending and borrowing activity also remains lower than expected due to economic uncertainty.
4. Economic growth. The underlying cause for both low interest rates themselves and the Fed policy to encourage low rates is a weak economy. However, there is growing evidence that this is finally turning around. U.S. employment growth just posted the best first six months of any year since 1999. Short-term deposit rates remain near zero and, as noted above, mortgage rates actually fell in the first half of this year.

We cannot predict the future, nor should we try to, but based on the economic activity over the last several years and forecasts for the medium-term future, economic volatility appears here to stay. Interest rates may be higher than normal, lower than normal, or remain unchanged, but the impact that interest rates have on your personal finances will certainly continue.

Food for thought!

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