Interest Rates May Double in the Next Few Years

Posted on February 21, 2018

The smartest business owners I know are always looking ahead. Talk to anyone today who’s been in business for more than a decade and they’ll tell you that, sure, they’re keeping a close eye on current sales, projections, overheads and other issues at hand. But they’ll also tell you that most of their thoughts are taken up by the issues they’ll be facing two or three years down the line. How will healthcare costs be kept in control? How to find, motivate and compensate the best people? Where will the economy be heading?

And what about interest rates?

Yes, today’s interest rates are still historically low. The Federal Funds rate, which is the rate the Fed uses to loan money to its member banks, is only 1.5 percent. But in the next couple of years, that rate is projected to rise to 3 percent. That’s still pretty low. But it’s a doubling of current costs – and for many businesses this could be an issue.

Why the significant rise in interest rates over the next few years? There are two big reasons.

The first is that the Fed is unwinding its assets. For many years, the Fed has held about $1 trillion of treasury and other debts on its balance sheet, representing the main part of its asset portfolio. But a big change happened in 2008. During that year’s Great Recession the Fed lowered interest rates in order to spur investment. Unfortunately, their actions weren’t enough to kick start the economy. So, in a very unusual move, the central bank went on a buying spree. It bought up trillions in U.S. treasury debt and mortgage backed securities. It did this to restore confidence in those securities, stabilize markets and hopefully drive down interest rates even further.

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