What’s really going to happen with interest rates?

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Well, in short…they’ll go up. But that’s the obvious answer. There’s a lot more to discuss.

If you pay attention to the business or economics articles in the news, everything seems to be about the Fed. When will they raise rates? How will they exit QE3? Will the market tank because of it? Should the Fed have more or fewer policy targets? Is the Fed’s balance sheet a non-event or a sign of impending doom?

It seems that much of the populace correctly understands that economics is a science, but may not understand it is a social science. Unlike physics or chemistry, with repeatable experiments and great predictive capability, economics is an attempt to describe the behaviors of economic agents – us. We aren’t as predictable as gravity, so economic outcomes aren’t terribly predictable, either. (At least not at the macro level. Micro-economics is a social science but it operates with fewer variables and thus greater certainty.) As a result of that uncertainty, there are no hard and fast answers to the questions above. People who tell you otherwise are exaggerating their prognostication skills. They are meteorologists working with dollars but would like you to think they are physicists working with gravity.

The Fed has been working hard to keep the economy functioning by encouraging productivity via monetary policy. But survey 100 random economists and you’ll likely get a variety of opinions about whether what they are doing is working now, worked in the past, or will work in the future. The end result, though, is that interest rates have been incredibly low for a long time now. As a banker, it’s still strange to see a cost of funds below 1% for many maturities. As a consumer, I’ve become very acclimated to the low rates and know it will be a shock to have the yield curve return to something normal.

If you are offering consumer financing in order to sell your products, this change in popular expectations of interest rates will impact you when rates start to rise. Are you prepared to help change the common perception? Are you aware enough to handle the inevitable questions?

Interest rates will go up eventually. We’ll try to offer a little information on this blog over the next few months to help you be prepared.

 

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