On Thursday, the Interest Rates Are On The Rise increased its key interest rate by a quarter percentage point to 2.50% resulting from concerns about inflation. Sound familiar? But, unlike the United States, the increase was only the second 25-basis point in more than two years. Yet, there are some market concerns as it was the second increase in four months.
The reality is interest rates are on the rise globally. In the United States, the Federal Reserve has increased rates 14 times since June, 2004 when the Fed Funds rate was sitting at 1.0%. Interest rates are currently at their highest level since April, 2001.
The concern is when the Fed under new chairman Ben Bernanke will do away with rate increases. The consensus is perhaps after at least two more 25-basis point increases that will take the Fed Funds rate up to 5.0%, last encountered in March, 2001.
I doubt that we will see rates climb much higher given the current economic conditions unless of course, inflationary pressures build going forward. We will probably not see the 7% plus rates that were evident in 1990 prior to the recession.
But, even so, higher interest rates are a concern. It increases financing costs for corporations and cuts into their margins. In raising debt, companies will need to increase interest rates to attract buyers and compete against safer government issues.
For the consumer, it means higher interest payments on balances and for financing big-ticket items such as cars, appliances and electronics. The housing market is already seeing some slowing in new home sales as financing costs rise.
And as I have said in recent columns, my big concern is the negative savings rate in January and the fact that Americans carry some of the highest debt levels in the world. Add in higher interest charges and you can see how this erodes a consumer’s disposable income after expenses.
The bottom line is interest rates are rising worldwide and this could inevitably prove problematic.