Manage episode 295163860 series 2912258
For six years now the cost of money---borrowing it anyway has been incredibly cheap, and that was by design. But now the so-called cheap money strategy is over, as the Federal Reserve ended it’s 2 day monetary policy meeting by dropping hints that inflation is the wild card and if prices keep climbing interest rates will begin heading north as well.
Right now, banks pay less than a quarter point to borrow money. That’s about as cheap as it gets. So interest rates for consumer borrowing, everything from auto loans to mortgages and home equity loans are near historic lows. But because the climate for borrowing money is so inexpensive, the rates for savings are paltry, so investors looking for value do their shopping and buying on Wall Street.T he Dow, Nasdaq and S and P keep churning out record averages because so much money is coming in.
But watch out. The Dow tumbled a few hundred points on the Fed’s message of interest. Wall Street hates surprises and it was surprising that the Fed would even think of raising rates. But if there is one thing that can screw up a good economy it’s inflation. Prices are rising now for a couple of reasons. With the Pandemic shutting large sectors of the economy, many industries stalled. To jump start production again, they’re facing new costs, paying more for workers, working them longer hours and paying more for raw materials and transportation, with gas and diesel now costing a third more in some parts of the country than it did before Co Vid came calling. There’s also that supply and demand and greed scenario. Finally released from pandemic prison, folks are out and about, traveling more, and because they can, airlines, rental car companies and hotels are all charging more--because they know if you won’t pay it the person will.
For now, we’re all putting up with it; most of us didn’t do much last year, so we’ve got more dough and even when we did spend, the money seemed to get replenished by The Cares Act or the ensuing stimulus payments.
Consumer prices are up 5 percent year over year. Wholesale prices increased by nearly 7 percent. The Fed’s betting the Economy will grow by about 7 percent--with inflation for 2021 coming in at around 3 and half percent. If that reading of the tea leaves is on point..rates won’t go higher next year but could in 2023. If inflation is higher, rates will rise sooner.
It won’t be crazy, like the 20 percent interest rates of 1980, but even a slight rise, could mean a few hundred bucks more for the mortgage--enough to keep some buyers from pulling the trigger. It could also lead to tighter credit. Watch the markets. If there's uncertainty, there’s selling. If interest rates go higher, investors hedging bets will move money into bonds again.
We’re moving out of CoVid and free to spend again, in theory clearing the way for an economic take off. But it could be a bumpy ride, and a long one.