My Theory on Interest Rates and Why They Won’t Fall Much

You’d think that with the U.S. housing market in the doldrums, the U.S. economy slowing down, and the stock market rallying like it expects shrinking interest rates ahead, falling rates is exactly what we’d get. Unfortunately, I believe the Fed has its hands tied when it comes to interest rates.

I don’t believe interest rates in the U.S. will fall much, if at all, in the near term simply because the remainder of the world is booming and the U.S. isn’t. GDP in the 13 countries that make up the Euro zone rose 3.1% in the first quarter of this year, higher than analysts had expected, and likely resulting in an interest rate hike soon to cool the economy.

If interest rates are rising in Britain and in Europe, how can the U.S. cut its interest rates and risk a collapsing U.S. dollar? It won’t.

Every country wants a lower priced currency compared to the rest of the world. But, as I’ve written before, the decline in value of the U.S. dollar against other world currencies needs to be gradual so as to not scare foreign buyers of U.S. bonds. The Canadian dollar is now at a 29-year high against the U.S. greenback.

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We will not see shrinking interest rates in the U.S. while interest rates in Europe keep rising.

NEWSFLASH — U.S. gasoline prices hit a record earlier this week, hitting $3.10 a gallon on Monday. Higher gas prices and a weaker U.S. dollar that doesn’t buy you much in Europe will keep American tourists close to home this year. This may be the year we get more foreigners visiting the U.S. than Americans visiting foreign countries.