I have written many times on these pages recently about the dangers of our out of control spending and the associated debt load that has been racked up by this administration and its irresponsible fiscal policies. The old saying, “there is no free lunch,” is still true. The consequences of our fiscal madness are already being seen regarding our national security, the squeezing of other important budget priorities, and in our nation’s credit rating. However, the most serious short term consequence has yet to happen; although, there are signs that it may be on the horizon.
I’m talking about interest rates. And, I’m talking about them going higher, soon. There are two types of interest rates you need to be aware of. The Federal Reserve Bank of the United States controls, on the surface, only very short term rates. The Federal Open Market Committee (FOMC) meets regularly to set the rate that banks will earn by lending cash they have on deposit at the Federal Reserve Bank to other financial institutions. This is an overnight rate. However, many longer term rates are based off the Fed Funds rate. The Fed has a dual mandate to control inflation but also to achieve “full employment.”
These two mandates are in conflict with each other. In an economic slow down, the Fed lowers rates to help the economy and therefore drive job creation. As the economy recovers, the Fed will raise short term rates to control inflation. The problem is, the economy is slowly recovering and the Fed has signaled it will begin to raise short term rates soon. Some economists estimate this will happen within the next year. Also, the Fed has been buying our own treasury bonds to create demand and keep longer interest rates low.
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Yes, you heard right, the United States sell bonds to raise money and prints the money to buy its own debt. I wish I could do that! The Fed has signaled this buying is slowing and will end soon as well. So, this will be a double whammy on interest rates. This will impact the economy in a negative way. It always does. The stock market will get hit as well. It always does. It’s not different this time.
So if you have a variable car rate car loan or mortgage, your monthly payment will increase. If you need to initiate a loan of some kind, your rate will be higher than it is today. If you have a large debt load, pay it off. Or, refinance it and lock in the low long-term rates of today! It’s free money and won’t last! This is one time in history that you have a warning of a negative future event and the time to do something about it! But as they say on Wall Street, interest rates are low until they’re not – so do it now!
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