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Could Rates Stay Low For Years? 

By BankFoxStaff -- posted May 5, 2010

Last week the Federal Reserve said that it was leaving its benchmark interest rate near zero where it's been for the past 16 months. Given that interest rates have been so low for more than a year and that the economy has finally started to improve, some analysts have started to wonder whether the fed will soon change its policy and start raising rates to more normal levels.

We at BankFox wish we could predict the future – it would make investing a little bit easier. Yet despite us not having a crystal ball, we've seen a great deal of evidence that suggests it will be a while until the fed raises rates. And even when it does, it appears that they may keep them relatively low for a while, perhaps as much as several years, given all of the following factors:

The job market is still really bad: Keeping interest rates low encourages individuals and businesses to borrow and spend money, which generally leads to more hiring (or at the very least, less firing) in the overall market. Despite a slightly improving economy, the unemployment rate is still the highest it has been in years, and economists agree it will take at least a few years of growth to get it back to a comfortable level. Until unemployment is under control, we think it’s unlikely the fed will substantially raise rates.

Banks continue to have trouble: As we posted several weeks ago, banks keep deteriorating as they deal with the backlog of bad loans. It is generally less expensive (and more politically viable) for the fed to keep interest rates low to help troubled banks, rather than bail them out with loans or clean up the mess after they fail completely. Until the vast majority of bad loans are purged from the system, it’s likely the fed will keep rates low to minimize the number of bank failures, and this could take years.

Inflation is still very low: Typically the reason interest rates aren’t kept low for too long is that it can lead to prices on everyday products rising quickly. However, despite an extended period of low interest rates, inflation has barely appeared. In fact, with businesses having so much extra inventory, we’ve seen them cut prices so much that the country has been flirting with deflation (where prices go down). Until serious inflation starts appearing, there is much less reason for the fed to raise rates.

The housing market is still very weak: Between giving tax credits to first time home owners and buying up mortgages that others don’t want, the government has bent over backwards to prevent housing prices from plummeting too much further than they already have. But now some of those programs are ending, which means that the housing market’s improvement might stall or reverse itself. Leaving rates low helps the housing market recuperate, and until there is multi-year improvement, the fed is unlikely to raise rates too much to stunt any recovery.

So although the economy is showing some signs of improvement, there’s evidence that we will be facing low interest rates for a while. We shouldn’t even be surprised if our rates are low for years - after all, Japan has seen interest rates below 1% for more than 10 years since its economy stalled in the 90s. Hopefully the US economy won’t follow a similar fate.

Regardless, all of this is not good news for us savers who want to earn interest on the money we have in savings bank. Despite already having a year with record low interest on our bank accounts, it doesn’t look likely we’ll be earning much better rates anytime soon.

Categories: Bank Advice, Financial Education.

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Comments

The article is right on the mark. There is no indication that the Bernanke Fed will raise rates anytime soon. The earliest one can expect any increase would be mid-2011 and only a 1/4 point increase. The banksters on Wall Street are enjoying a Goldilocks scenario borrowing money at zero percent. Bernanke is not about to interrupt that scenario for his buddies.

Posted by texasmiatafrank -- May 5, 2010 11:12 PM

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