Why are increasing interest rates a good thing?

[Jerry1]

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?

 

[youbet]

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.

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".........

 

[UnrealizedPotential]

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.

 

[corn18]

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.

 

[ShokWaveRider]

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.

 

[Ready]

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.

 

[corn18]

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.

 

[audreyh1]

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.

 

[MichaelB]

I prefer lower inflation.

Let's see what Chairman Powell prefers - and also how he chooses to measure.

 

[Texas Proud]

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...

 

[audreyh1]

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

 

[corn18]

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.

 

[audreyh1]

There are quite a few recent years missing on that greshams-law.com graph!

 

[Dtail]

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%.

 

[Hyper]

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.

 

[Texas Proud]

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/

 

[brucethebroker]

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.

 

[Oz investor]

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

 

[Oz investor]

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

 

[Oz investor]

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

 

[scrabbler1]

I have seen the monthly dividends per share in my main bond fund drop from 5 cents to 3 cents, a serious drop. I have been able to buy more shares over the years to offset some of that drop, but I would still welcome some increase in the DPS, even back to 4 cents per share.


I also wouldn't mind the DPS drop if my dang health insurance premiums weren't rising 15-20% per year, making it now my biggest expense.

 

[DrRoy]

Rising rates are generally better for better for lenders and worse for borrowers. The Federal Reserve sees higher rates as heading off excess inflation by moderating business activity.

 

[ownyourfuture]

For home buyers it's bad news

But isn't it possible that if the average 30 year fixed went from 4.50% to 6.50%
(still fairly low historically) home prices 'could' drop enough to make it a 'wash' or maybe even a gain for the buyer ?

 

[nash031]

I'm fine with rising rates... that is as soon as I lock in my 30-year mortgage here in a few days. Then they can do what they want. I'd appreciate a safer haven for short-term cash yielding a little bit more, even if inflation goes up. Rising inflation - within reason - can help a number of economic indicators.


I think people on this board are generally favorable to this because most aren't looking to borrow or running adjustable rate debt.

 

[RobbieB]

I hate rising rates, makes my bonds go down.

Oh well they are there just so that I don't have all my dough in stocks -