Welcome to the Highest Interest Rates in the World

Look at what feat we’ve achieved here in America:

With the Federal Reserve’s latest interest rate hike, the United States now has the distinct honor of having the highest central bank rate of the Group of Seven Industrial Countries.

At 4.75 percent, our central bank rate is one-quarter percent more than the Bank of England’s central rate, one full percent point more than the Canadian bank rate, and 2.25 percent more than the European Central Bank rate.

But the U.S. Fed is not finished yet. Rates will likely rise another quarter point at the next Fed meeting, bringing the Federal Funds Rate to 5 percent. Right now, the central bank rate in the U.S. is at its highest level since April 2001. The Fed has raised rates in the U.S. 15 times in a row since mid-2004–the biggest stretch of increases in more than 25 years.

While different analysts will comment on why they think interest rates have risen so aggressively in the U.S., while the Fed will tell you it’s to tame inflation, while others will say it’s too cool the housing market, here are my observations:

Core inflation is under control. The housing market has cooled as the interest rate on the popular 30-year fixed mortgage is close to a 36-month high. Here’s a spin on why interest rates are moving so high in the U.S. that you will only likely read here (I, for one, haven’t read it anywhere else).

With the U.S. savings rate near its lowest level since the Great Depression, with the amount of debt being carried by both governments and consumers in the U.S. at record highs, with the annual U.S. Federal Government deficit reaching new record highs each year, it’s amazing the U.S. dollar hasn’t collapsed in price against other major world currencies. I believe the collapse hasn’t happened because high U.S. interest rates are propping up the U.S. dollar.

If you were a foreign country, would you buy U.S. bonds (to finance U.S. debt)? You probably wouldn’t unless the interest rate was so attractive as to reduce your fear of the U.S. currency devaluating. The U.S. desperately needs foreign money to finance its ballooning deficit and higher interest rates are one way to ensure that foreign money continues flowing in.

While Bernanke may have only a couple of more interest rates hikes up his sleeve, rates will not be lowered until the U.S. economy starts showing clear signs of slowing. That’s why higher interest rates are here to stay for a while.