Rick on CNN: 5 Things To Know About Interest Rates
The Federal Reserve left rates steady at its latest meeting. But the rates on consumer and business loans have been rising anyway.
CNN invited me on air on July 29 to talk about the Federal Reserve’s latest interest-rate decision. The Fed made no changes, so short-term rates stay the same, for now. That’s what most people expected.
But a lot is happening with interest rates, and they affect stock values and borrowing costs for ordinary Americans. Bullet points below. Here’s the CNN clip:
The Fed controls short-term rates that mostly affect banks. That’s important, but the Fed does not directly control long-term rates on mortgages, car loans, and most other consumer and business loans. Those have been gradually rising since the start of the Iran war in February, because the energy crisis has pushed inflation higher. When investors think future inflation will be higher, they demand higher rates of return on bonds for committing their money. That has pushed mortgage rates, for instance, from just below 6% in February to about 6.6% now. Most other borrowing rates have risen by a similar amount.
The Fed is struggling like all the rest of us to figure out what’s going on with inflation. That’s because nobody knows when the Iran war will wind down. By the time the Fed meets again in September, oil prices could be near $70 per barrel, if a ceasefire actually holds, or as high as $110 if the war continues.
There are other inflationary pressures, but they’re hard to suss out when a huge anomaly like a war is clouding the picture. Some electronics components, for instance, have been soaring in price, because the AI buildout has juiced demand and created shortages. But if oil prices drop, that might not be enough to warrant rate hikes.
Stocks sank after the Fed meeting, as interest rates rose even further. The market seems to think the Fed might sit on its hands too long and let inflation get too high. But that could be a one-day knee-jerk reaction. Markets sometimes reverse themselves when big moves seem out-of-sync with actual developments. The Fed didn’t surprise anybody by keeping rates steady. So dip-buyers might decide the market reaction was overblown, creating a buying opportunity.
Prediction markets put the odds of a small rate hike at about 55% when the Fed meets in September. Until then, earnings, war developments, and other things will drive the market.
Excellent explanation in that CNN segment! Very clear discussion of the issues involved, despite the outlook itself being muddy.
Investment guru Ken Fisher, relying on Milton Friedman, claims that if only oil stays high for an extended period, that by itself won't raise the overall inflation rate unless money supply also goes up (e.g. thru a stimulus, in which case you have too much money chasing too few goods). If money supply stays broadly flat or on its normal, slightly upward trend, then households and businesses will adjust their spending such that some other categories suffer a bit of demand lowering as energy consumes more spending dollars, with the overall rate of inflation then staying pretty much where it was (2.5--3% per year range, roughly). This is of course over a longer period of time. Obviously the rate of inflation might shoot up for a few months until households and businesses start trimming their other spend. It's an interesting take. Just thought I'd mention it as a non-economist.