Are Interest Rates Really Too High?

The stock market has been a mess over the last couple of months.  I guess after almost a decade of solid growth, it was time.  Of course, our President has a different thought.  He blames high interest rates.  The President has been pushing the Federal Reserve to lower interest rates.  They haven’t been listening.  Currently the Fed rate stands at 2.25%.  So, are interest rates too high?

Comparing Interest Rates To Recent History

In a quick answer, no.  Interest rates are not that high at all.  Of course, this takes some comparison.

Since the start of the 1990’s, interest rates have been higher than they are now more often than not.

The entire decade of the 1990’s saw interest rates in the 4-6% range.  I remember that, at the time, this was considered pretty low.  The 1970’s and 1980’s had very high rates.  So a drop to 4-6% was actually a relief for many!

In the early 2000’s, interest rates did drop for about 4 years to levels lower than today.  The 1-2% range followed a pretty bad post-Y2K recession, as well as 9/11.  Lower rates were used to provide a boost to a dragging economy.

Following 2004, the economy ‘recovered’ and interest rates were back up around 5% for the next few years.  In 2008, the bottom fell out of the economy, and they were quickly lowered, all the way down to practically zero.  Come to find out, the economy wasn’t as stable as had been purported.

Interest rates stayed at those non-existent levels for seven whole years!  It wasn’t until 2015 that any increases were seen, and even those were small.  It wasn’t until 2017 that more than one increase per year took place.

That’s nearly ten years of extremely low interest rates.

Perspective On Interest Rates

The president is arguing that the rate increases are hurting the economy.  He has asked for them to be lowered.

The Fed has all but ignored him.

From a historical standpoint, interest rates really don’t look too high at all.  But, we also had the lowest interest rates ever for a very long period of time.  Bottom line, we got complacent.

Right now, a 15 year mortgage is around 4.5%.  This probably is considered high for many who financed at or even below 3%.  Again, looking at how long interest rates were low, a great many people got these rates.

However, they were never meant to be a ‘forever’ thing.  But, nearly ten years of practically no interest did start to feel like forever.  It became the new normal.

Why We Need Higher Interest Rates

I studied Economics in my undergraduate.  So, while I’m no expert, I do remember enough to understand that we do need higher interest rates.  We can’t keep them the levels they were at forever.

Eventually, the economy will go into a recession.  The economic cycle makes this a certainty.  Recessions are good for the economy.  We just don’t want them to the scale of the last one!  But, a common tool to minimize the effect of recessions has been to lower interest rates.  This encourages companies to borrow and spend money.  This leads to jobs.  If it all works out, eventually the recession ends.

But in order to do that, we must first raise them.  These rate increases are done when the economy is doing well.  Like it is now. The idea of this is that a strong economy can withstand the increases.

This system has worked well for quite some time.  But, it’s predicated on having the cushion in interest rates to be able to lower them.

interest rates
Interest rates affect spending.

Why We Can’t Keep Interest Rates Low Forever

Think of what would happen if we had 0.25% interest rates and slipped into a recession.  What could we do?  Well, one thing we wouldn’t be able to do is lower interest rates.  This would end up making it harder to pull out of the recession.  The recession would likely last much longer than normal.  Plus, other less effective measures would have to be taken.  Tax cuts or additional spending would help, but would spur higher deficits and more inflation in comparison to interest rate cuts.

Personally, I thought that the Fed waited too long to start raising rates.  I thought they should have started around 2013 or so.  By that point, the real estate market had stabilized.  Unemployment was near pre-recession levels.  I knew full well that the longer the Fed waited, the more ‘normal’ the ultra-low rates would seem.  And, that’s the thing.  They weren’t normal.

The bottom line is that interest rate cuts are a needed tool to fight recessions.  Building that cushion during times of growth will help us down the line when we need an economic boost.

Do you think rates are too high?

Readers, let me know what you think.  Have we gotten too used to low rates that we now expect them?  Do you think the Fed should lower rates or keep on the current path?  Let me know in the comments below.

8 thoughts on “Are Interest Rates Really Too High?”

  1. I don’t think the interest rate is too high. You can’t run the engine hot forever, it’ll blow.
    Last week, I checked the 30 year mortgage rate at our bank and I was surprised. It was over 5%. Now I feel good about our 4% mortgage.
    That’s a lot better than our first mortgage in 1999. I think we had 9% or something like that. It was probably higher because we were young. We refinanced that mortgage quite a few times.

  2. I don’t think rates are too high, but I do think the pace of change is getting to the point of being too quick. The raw dollars in interest expense for corporate borrowers on L + 1.00% type spreads have more than doubled. This isn’t as much the current fed’s fault as it is the fault of the prior feds for not raising rates between 2012 and 2015. 2013 was a roaring year for the stock market and we could have easily handled getting back up near one. One current Bank CEO was encouraging the fed to act at that time pointing out interest rates should not be kept at “emergency” levels.

    • Exactly. I think the Fed, at the time, was very beholden to Wall Street. If you remember, any time interest rates were even hinted at going up, the market would suddenly find itself with a couple of big ‘down’ days. Seemed like manipulation, but I guess if the Fed was falling for it….

  3. I agree that they waited too long before raising interest rates…and now they are raising them too fast. But the good news is that maybe it will work in our benefit when we are able to do some serious investing next year.

    Outside of mortgage interest rates, what other things does the fed interest rate effect? I’ve been meaning to look into this.

    • It’ll be interesting to see. Higher interest rates either mean that companies have to pay more to borrow money, which either affects their bottom line or they pass it along to their customers, or it increases inflation. None of these are great things. When the economy, they can easily be absorbed, but the question now is whether the economy is slowing down, in which case these could create a big negative impact. I think that’s one reason why the stock market is reacting so poorly these days.

Leave a Comment