Interest Rates…the Good, the Bad, and the Ineffective

interest-rates

width=”240″ height=”159″ />If Dr. Phil were an economist, he might ask the question, “How are those interest rates working for ya?” It seems that low interest rates are quite the mixed bag these days. And several different takes on them just happened to appear in three news articles today.

First, the good news – sort of. With many seniors and soon-to-be retirees concerned about low interest rates on their investments (see my previous 2 blog posts on a recent Wells Fargo/Gallup survey), there may finally be some hope for them. In the Wall Street Journal's SmartMoney article, “The End of Free Money,” Elizabeth O'Brien expects interest rates to rise after mid-summer. This is great for those who have endured years of next-to-nothing returns on C.D.s and savings accounts. Although it bears mention that bond prices will fall as interest rates rise, affecting those who are heavily invested in bond funds.

Now, the bad news: In another WSJ article, firms want to reduce their penson obligations by paying their current retirees lump sum payments, but today's low interest rates means the payouts would have to be larger than if interest raters are higher. As a result, lump sum payouts today would be a costly way for firms to unload pension obligations. The only thing for them to do is wait and hope for higher interest rates while continuing monthly payments to retirees.

Finally, the ineffective: A third WSJ describes the great “credit divide,” -

the haves and have-nots of borrowers, so to speak. Apparently, low interest rates are available to all except those who can't get loans due to bad credit scores. The Fed is bewildered as to why low interest rates are not stimulating more borrowing. Answer: Those who need to borrow can't, and those who qualify to borrow don't need to.

Welcome to the world of monetary policy, where some of the people are happy some of the time, and there is no easy answer. Perhaps Mr. Bernanke should post the same sign that hangs on my wall: “I can only please one person per day. Today is not your day and tomorrow doesn't look good either.”

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Comments (4)

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  1. Big Daddy says:

    haha I love that sign in your office. Nixon should have just kept us on the gold standard–we’re all paying for that little fiat experiment now.

  2. Joe Barnett says:

    There’s only so much monetary policy can do for the economy. A dollar with a stable value would be nice.

  3. Jasmine says:

    Really great.. Cheers for your stuff on the blog post
    Interest Rates

  4. Phillip says:

    First-class information on Interest Rates