Join Early Retirement Today
Reply
 
Thread Tools Display Modes
Why are increasing interest rates a good thing?
Old 08-08-2018, 03:11 PM   #1
Moderator
Jerry1's Avatar
 
Join Date: Nov 2014
Posts: 9,101
Why are increasing interest rates a good thing?

I understand that a 3% CD is better than a 2% CD but, I’m wondering why the increase is viewed as a good thing by members of this forum. My understanding is that interest is two components - the cost of money and inflation. So doesn’t the increase we’re seeking mean that inflation is growing which is typically a bad thing?

Is it because of the make up of this forum - low to no debt, not big spenders, good amount of cash . . . makes the situation different for us? I’m reacting to the thought that everyone, including myself, would love the double digit interest income from the later 70’s, but if we had it, wouldn’t it also mean we’d have a rough economy to go along with it?
__________________
Every day when I open my eyes now it feels like a Saturday - David Gray
Jerry1 is online now   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 08-08-2018, 03:16 PM   #2
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
youbet's Avatar
 
Join Date: Mar 2005
Location: Chicago
Posts: 13,151
The important thing is not whether interest rates are (relatively) high or low, but knowing how to manage your investments and financial life correspondingly. At least for folks with significant financial resources and wiggle room to maneuver.

Quote:
I’m reacting to the thought that everyone, including myself, would love the double digit interest income from the later 70’s
Actually, NOT everyone "would love the double digit interest income".........
__________________
"I wasn't born blue blood. I was born blue-collar." John Wort Hannam
youbet is offline   Reply With Quote
Old 08-08-2018, 03:34 PM   #3
Thinks s/he gets paid by the post
 
Join Date: May 2014
Posts: 1,390
I'm not sure it is . For home buyers it's bad news. For companies it's bad news. For the stock market it's mostly bad news. For those who need to borrow money it makes the cost of staying in business increase. That's a whole big section of society. But as we all know as the economy hums along the Fed wants to keep the lid from blowing off, so they raise rates.


I think for the stock market, raising rates is fine for now. But for how long? If the Fed keeps raising rates there will be a point where the stock market wakes up with a hangover. The cost of borrowing will become too costly. That never has a happy ending I don't think.


My feeling is inflation is still pretty tame. If it started to rise rapidly the Fed would be raising rates more frequently and instead of a quarter point raises we would see half or larger. That hasn't happened yet. But it could at some point.
__________________
Understanding both the power of compound interest and the difficulty of getting it is the heart and soul of understanding a lot of things. Charlie Munger

The first rule of compounding: Never interupt it unnecessarily. Charlie Munger
UnrealizedPotential is offline   Reply With Quote
Old 08-08-2018, 04:00 PM   #4
Thinks s/he gets paid by the post
corn18's Avatar
 
Join Date: Aug 2015
Posts: 1,890
Rising interest rates in and of themselves are not a bad thing. Inflation is what kills the bulls. And if rates are rising, then there is a chance of rising/early 80's type inflation. Usually the Fed intervenes by raising rates,mucks things up and just throws us into a recession. Then rates drop again.
corn18 is offline   Reply With Quote
Old 08-08-2018, 04:07 PM   #5
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Jun 2003
Location: Florida's First Coast
Posts: 7,666
Probably because most folk here are not really borrowers or have their mortgages at a good rate.

In my case zero debt, so I really do not care about the cost of money. OK a little maybe as I like to lease cars, but I can cope with that. I am more interested (pun intended) solid low risk return in my old age.
__________________
"Never Argue With a Fool, Onlookers May Not Be Able To Tell the Difference." - Mark Twain
ShokWaveRider is online now   Reply With Quote
Old 08-08-2018, 04:15 PM   #6
Thinks s/he gets paid by the post
Ready's Avatar
 
Join Date: Mar 2013
Location: Southern California
Posts: 3,995
Interest rates and inflation rates do not always move entirely in sync. So a rising interest rate doesn't necessarily mean an equal rise in inflation rates. Rising rates are good for people who don't need to borrow money and have relatively fixed expenses (own their home vs rent). With CD rates inching toward 4% we are getting to the point where we can count on CDs to be a component of our fixed income portfolios and provide enough returns to keep up with a 3-4% withdrawal rate.
Ready is offline   Reply With Quote
Old 08-08-2018, 04:20 PM   #7
Thinks s/he gets paid by the post
corn18's Avatar
 
Join Date: Aug 2015
Posts: 1,890
Quote:
Originally Posted by Ready View Post
Interest rates and inflation rates do not always move entirely in sync. So a rising interest rate doesn't necessarily mean an equal rise in inflation rates. Rising rates are good for people who don't need to borrow money and have relatively fixed expenses (own their home vs rent). With CD rates inching toward 4% we are getting to the point where we can count on CDs to be a component of our fixed income portfolios and provide enough returns to keep up with a 3-4% withdrawal rate.
Agreed. When everything is balanced and in moderation, the system seems to hum along nicely. There's always an Arquillian Battle Cruiser, or a Corillian Death Ray, or an intergalactic plague that is about to wipe out all our life savings. Rudder amidships, steady as she goes.
corn18 is offline   Reply With Quote
Old 08-08-2018, 04:25 PM   #8
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
audreyh1's Avatar
 
Join Date: Jan 2006
Location: Rio Grande Valley
Posts: 38,007
I prefer lower inflation. The Fed finally got it within its target - it had been a bit too low. Seems like steady as she goes now.

I've mainly viewed the current rising interest rates as a "good thing" mainly because we are finally climbing out of the extended quantitative easing period because inflation and the economy are a bit more normalized. Plus sure, I can get a bit more on my short-term investments.
__________________
Retired since summer 1999.
audreyh1 is online now   Reply With Quote
Old 08-08-2018, 04:26 PM   #9
Administrator
MichaelB's Avatar
 
Join Date: Jan 2008
Location: Chicagoland
Posts: 40,585
Quote:
Originally Posted by audreyh1 View Post
I prefer lower inflation.
Let's see what Chairman Powell prefers - and also how he chooses to measure.
MichaelB is online now   Reply With Quote
Old 08-08-2018, 04:32 PM   #10
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: May 2005
Posts: 17,203
Let me pull up a graph so you can see what the problem really is...


This is real interest... actual rates minus inflation... as you can see we have had negative real interest rates for awhile...



Rates need to normalize, which is 2% to 3% real... or close to 5% to you and me...









Texas Proud is offline   Reply With Quote
Old 08-08-2018, 04:32 PM   #11
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
audreyh1's Avatar
 
Join Date: Jan 2006
Location: Rio Grande Valley
Posts: 38,007
Quote:
Originally Posted by MichaelB View Post
Let's see what Chairman Powell prefers - and also how he chooses to measure.
This is how they measure inflation:

Figure 9 is from this article: Dr. Ed's Blog: Tug of War In the Bond Market
__________________
Retired since summer 1999.
audreyh1 is online now   Reply With Quote
Old 08-08-2018, 04:35 PM   #12
Thinks s/he gets paid by the post
corn18's Avatar
 
Join Date: Aug 2015
Posts: 1,890
Quote:
Originally Posted by Texas Proud View Post
Let me pull up a graph so you can see what the problem really is...


This is real interest... actual rates minus inflation... as you can see we have had negative real interest rates for awhile...



Rates need to normalize, which is 2% to 3% real... or close to 5% to you and me...









QE at its finest.
corn18 is offline   Reply With Quote
Old 08-08-2018, 04:37 PM   #13
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
audreyh1's Avatar
 
Join Date: Jan 2006
Location: Rio Grande Valley
Posts: 38,007
There are quite a few recent years missing on that greshams-law.com graph!
__________________
Retired since summer 1999.
audreyh1 is online now   Reply With Quote
Old 08-08-2018, 04:41 PM   #14
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Jan 2018
Location: Tampa
Posts: 11,229
Markets have done well in the past with rising rates, just not crazy high. It is not a 70's/early 80's situation or 2%.
__________________
TGIM
Dtail is online now   Reply With Quote
Old 08-08-2018, 05:28 PM   #15
Recycles dryer sheets
 
Join Date: Nov 2014
Posts: 269
IMO and a cpl bank presidents I've had conversations with in the past, interest rates should be at least 1% higher than they currently are now. The reason they are not is so congress, PAST and present want to keep spending. Raising interest rates also raises the rate on our debt and congress is trying hard to keep that down but can only press that for so long before it starts to do damage. IMO! Also, it's time to let the LBYM individuals to some relief. The markets have done well for many yrs now.
Hyper is offline   Reply With Quote
Old 08-08-2018, 06:46 PM   #16
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: May 2005
Posts: 17,203
Quote:
Originally Posted by audreyh1 View Post
There are quite a few recent years missing on that greshams-law.com graph!

Opps.... did not look when I pasted... just looked at the line...




Could not find FF rate graph, but here is the 10 year real...


http://www.multpl.com/10-year-real-interest-rate/
Texas Proud is offline   Reply With Quote
Old 08-09-2018, 03:08 AM   #17
Thinks s/he gets paid by the post
 
Join Date: Dec 2010
Location: Midwest
Posts: 1,789
IMO, the low interest rates of the past dozen years have been stolen (subsidized) from those who worked hard, saved their money and wanted a conservative/safer retirement.

Low interest rates have benefited spendthrift consumers and politicians eager to spend other peoples money.

Housing, autos and student loans have all soared due to the easy money (remember the "refinance your home to pay off your CC debt" ads of recent years?). Retirees and other savers have been robbed-as in "Peter, we are going to pay you reduced interest on your CD to give Paul lower interest rates on his mortgage."

Lower interest rates also encourage investment in "riskier" investment vehicles. Why invest in 1% or lower CD's (recent years) when junk bonds and REITs pay so much more?

Not everyone is comfortable with a 60/40, 50/50, etc. AA in retirement. Many would prefer 20/80% but have been unable to find decent rates of interest on that 80%. Hopefully, today's higher CD rates, and those forthcoming (as the Fed eases Qwhatever) will change things a bit.
brucethebroker is offline   Reply With Quote
Old 08-09-2018, 03:39 AM   #18
Full time employment: Posting here.
Oz investor's Avatar
 
Join Date: Jun 2018
Location: Brisbane
Posts: 855
Quote:
Originally Posted by Jerry1 View Post
I understand that a 3% CD is better than a 2% CD but, I’m wondering why the increase is viewed as a good thing by members of this forum. My understanding is that interest is two components - the cost of money and inflation. So doesn’t the increase we’re seeking mean that inflation is growing which is typically a bad thing?

Is it because of the make up of this forum - low to no debt, not big spenders, good amount of cash . . . makes the situation different for us? I’m reacting to the thought that everyone, including myself, would love the double digit interest income from the later 70’s, but if we had it, wouldn’t it also mean we’d have a rough economy to go along with it?
i would debate on the ' big spenders ' generalization , i think some would only revert to normal US spending patterns after years of being frugal and fiscally prudent ( saved up first , for all those great experiences )


second in my limited observation regarding inflation and interest rates ( paid to retail investors ) inflation normally precedes CD interest rises .. maybe by as much as 6 months ... so diligent investors had better be in front of the curve .

inflation is NOT a bad thing for the fiscally prudent investor , but they do have to guard against reduced buying power
__________________
i hold the Australian listed versions of AU ( Anglo Ashanti ) , BHP , and JHG .

You must learn from the mistakes of others. You can't possibly live long enough to make them all yourself.

Samuel Levenson
Oz investor is offline   Reply With Quote
Old 08-09-2018, 03:42 AM   #19
Full time employment: Posting here.
Oz investor's Avatar
 
Join Date: Jun 2018
Location: Brisbane
Posts: 855
Quote:
Originally Posted by youbet View Post
The important thing is not whether interest rates are (relatively) high or low, but knowing how to manage your investments and financial life correspondingly. At least for folks with significant financial resources and wiggle room to maneuver.



Actually, NOT everyone "would love the double digit interest income".........

that double digit interest income is liable to come with an increasing tax obligation .. that might be unpleasant for some
__________________
i hold the Australian listed versions of AU ( Anglo Ashanti ) , BHP , and JHG .

You must learn from the mistakes of others. You can't possibly live long enough to make them all yourself.

Samuel Levenson
Oz investor is offline   Reply With Quote
Old 08-09-2018, 03:44 AM   #20
Full time employment: Posting here.
Oz investor's Avatar
 
Join Date: Jun 2018
Location: Brisbane
Posts: 855
Quote:
Originally Posted by brucethebroker View Post
IMO, the low interest rates of the past dozen years have been stolen (subsidized) from those who worked hard, saved their money and wanted a conservative/safer retirement.

Low interest rates have benefited spendthrift consumers and politicians eager to spend other peoples money.

Housing, autos and student loans have all soared due to the easy money (remember the "refinance your home to pay off your CC debt" ads of recent years?). Retirees and other savers have been robbed-as in "Peter, we are going to pay you reduced interest on your CD to give Paul lower interest rates on his mortgage."

Lower interest rates also encourage investment in "riskier" investment vehicles. Why invest in 1% or lower CD's (recent years) when junk bonds and REITs pay so much more?

Not everyone is comfortable with a 60/40, 50/50, etc. AA in retirement. Many would prefer 20/80% but have been unable to find decent rates of interest on that 80%. Hopefully, today's higher CD rates, and those forthcoming (as the Fed eases Qwhatever) will change things a bit.

+1
__________________
i hold the Australian listed versions of AU ( Anglo Ashanti ) , BHP , and JHG .

You must learn from the mistakes of others. You can't possibly live long enough to make them all yourself.

Samuel Levenson
Oz investor is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
Chasing increasing bank rates MJ FIRE and Money 0 03-16-2018 10:50 AM
Deferred annuities - rates increasing obgyn65 FIRE and Money 47 12-04-2013 08:18 PM
Genworth LTC rates increasing steeply on 8/1 dgoldenz FIRE and Money 7 06-30-2012 11:52 PM
Will CD Interest Rates Rise if Borrowing Rates Rise? John Galt III FIRE and Money 5 07-29-2011 11:58 AM
Increasing withdrawal rates aenlighten FIRE and Money 4 05-07-2007 03:03 PM

» Quick Links

 
All times are GMT -6. The time now is 12:19 PM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2024, vBulletin Solutions, Inc.