Interest Rates: Trends for 2015?

AMA1-8-15With every new year comes a round of predictions about the financial future. This year, as in many others, the fate of interest rates in 2015 and beyond is the subject of speculation, most of it pessimistic. Financial experts and economists are once again predicting that US interest rates will soar in the coming months. But several surprising factors both foreign and domestic play a major role in what happens to those rates – and they’re largely beyond the control of US economists.

Interest rates can be a key indicator of economic health. Typically, lower rates for both personal and commercial loans mean a more robust consumer economy – more people can borrow money, and that means more purchases of major items, new business startups an other enterprises. That in turn feeds the job market, keeps houses selling and encourages world commerce.

In the US, interest rates have spent the last several years in an artificially imposed holding pattern. The financial collapse of a few years ago was driven in part by runaway lending, especially in the housing industry – and that put millions of unprepared buyers in homes they couldn’t afford, with mortgages they couldn’t maintain.

The housing crash and the recession that followed prompted the Federal Reserve to intervene with the much-publicized Quantitative Easing initiatives that involved buying up large amounts of bonds and mortgage backed securities. That plan, the Fed reasoned, would encourage banks to lend more at lower interest rates and get the economy moving again.

In the years after the crash, interest rates did remain low – reaching historically low levels that did indeed stimulate more home buying. The employment picture brightened too, and although the dollar struggled in world markets against currencies like the euro, it remained a standard for international finance.

Those and other factors were enough to signal the end of Quantitative Easing. When the Fed announced in mid-2014 that it would start “tapering” QE3, the latest version of the stimulus toward the end of the year, market watchers began worrying that without the Fed’s manipulation, interest rates would surge. And that, they feared, would stall borrowing and trigger another collapse.

So far, that hasn’t happened. Rates have crept up, pushed by market forces, and that’s triggered new concerns that as the stimulus winds down, those rates will finally soar. But as a recent Business Insider article points out, events outside the country can affect the rise and fall of US interest rates.

The global nature of 21st century finance means that in a kind of “butterfly effect,” what happens in one area of the world can affect conditions thousands of miles away. Economic upheaval in Russia and the countries of Europe and Latin America can affect what happens to US interest rates.

Russia begins 2015 with an uncertain economic future: struggling with debt, sanctions and continued unrest in Ukraine. The ruble is in severe decline. Russians of all walks of life are opting to either invest abroad or convert their assets to foreign currencies. And the currency of choice is the US dollar.

Other countries too are doing brisk trading in foreign currencies as they face debt and currency crises. Greece is attempting to restructure its debt after its recent collapse. Argentina’s black markets trade briskly in dollars after that country fell far into debt. Even though the dollar has fluctuated against other world currencies, it’s still in wide demand for its stability and security – and that helps keep rates low at home.

World energy prices play a role in the rise and fall of US interest rates – and those prices are set in response to a host of factors both political and economic. Low energy prices can play role in holding down interest rates, too, and at the close of 2014, those prices were relatively low.

Environmental factors can also affect rates. Destructive weather events and other natural disasters can stress local and national financial reserves and increase demand for funds. And on the economic front, rates of deflation and inflation also play a role.

The rise and fall of interest rates is a measure of economic growth – and one worth watching for investors and consumers alike. For now, a combination of factors at home and abroad are keeping rates low – and challenging the perennial pessimism of economic forecasters. (Top image: Flickr/gorfor)

Source:

Oyedele, Akin. “5 Reasons Why Interest Rates Won’t Surge in 2015.” Business Insider. businessinsider.com. 30 Dec 2014

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The American Monetary Association Team

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