Watching interest rates

Date posted: May 23, 2012

Interest rates are one of the key factors in the economy. N.C. State University economist Mike Walden tells where they are now – and where they might be headed.

“Interest rates are low — in fact very, very low by historical standards. Short-term interest rates that you’re going to earn on, for example, a short-term CD or your passbook savings account or a short-term government bond (are) very low — close to zero.

“Longer-term interest rates on safe investments (are) around 2 percent. Again, those are historically low. In fact, now when you adjust for inflation, both of those interest rates are negative — which is virtually unheard of.

“Clearly these low interest rates are very bad for savers, particularly savers who want to put their money in safe investments, which is one reason why the stock market has been booming as people are looking for higher returns.

“On the other hand, the short-term, very low interest rates are good for borrowers. It’s also been good for the federal government. It’s kept the servicing charges on the federal debt very, very low.

“Now I think you can also use the direction of short-term interest rates in an indication of government policy, particularly Federal Reserve policy. If, if we start to see the Federal Reserve push their interest rates up — which is used as a peg … for other interest rates — I think that would be a major game-changer in the economy. It would tell us that the Federal Reserve is satisfied the economy is in good shape enough to stand on its own. It would obviously have a lot of implications for savers and borrowers, particularly, particularly for federal government interest on the national debt.”

 

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