Everyone seems to think that interest rates “have to eventually go higher”, but that is most definitely not the case. It takes a catalyst to move rates lower and it takes a catalyst to move rates higher. Usually, we would be talking about inflation as that catalyst, but not this time. Ben Bernanke has sold us on his loose monetary policy because of “tame inflation” figures, but what they measure, in his world of Academia, aren’t a lot of the items that effect the average consumer such as grocery costs, rent amounts, etc.
So, what are those catalysts and when are they likely to happen? First, we have to look at why rates went down. The Federal Reserve started buying Mortgage Bonds to keep mortgage rates down, which worked like a charm as mortgage rates are at all-time lows. But, it didn’t stop there. The Federal Reserve also lowered the overnight lending rate to effectively 0%. (It’s technically 0-0.25%)
There are two major results that come from any low interest rate environment.
#1 – The Stock Market goes higher. Just this week, the Dow Jones Industrial Average has hit an all-time high on essentially no economic news whatsoever. Because interest rates are so low (a 10-year CD at the bank pays about 1% APY), investors are forced to take on risk and invest in stocks in an attempt to earn a return to reach their investment goals. With a number of stocks paying 3%+ in yield and very few people having knowledge about alternatives like securitized real estate investments, investor money continues to pour into the stock market causing it to go higher as we have experienced since March of 2009 (The Stock Market has more than doubled since then).
#2 – The Government can afford to make payments on it’s debt and easily borrow more money. The 10-year treasury notes are paying right at 2% and the Government is taking in Billions of dollars a day selling these notes. The National Debt is over $16 Trillion. If that were all in T-bills at 2%, the monthly payment would be $147 Billion. The Government only brings in about $210 Billion per month. So right now, it costs the Government ~70% of it’s monthly income just to make the payments on it’s debt. If rates were to go higher, the numbers would become even less favorable.
So, we know who caused interest rates to go lower and we know why… What easier way is there to keep the public happy when the Economy stinks and Employment rates are awful than to have a Stock Market that goes up and makes record highs? What easier way is there to continue to spend money you don’t have then to be able to borrow at a cheap interest rate?
The Conclusion: Rates aren’t going back up until the Government has a balanced budget or a surplus budget and starts paying down it’s debt. Until then, they will need the low rates just to stay afloat! I don’t know if this will happen in our lifetime, but I’m very confident it won’t happen in the next 10-15 years at least. Expect a low interest rate environment and a light Stock Market for the foreseeable future. Nothing else makes sense for the Government, who is ultimately calling the shots. (through Ben Bernanke of course)
Anthony Jenkinson, Vice President at BKM Office Works in San Diego.