You may have heard about low interest rates in the newspaper, online or on TV, but what do low interest rates really mean for the general public?
Interest rates are based primarily upon the supply and demand for money. What are some of the positives and negatives of low interest rates?
Positives of Low Interest Rates
Business may be able to borrow more easily to expand
Low interest rates allow businesses to borrow more cheaply to buy equipment, hire employees, make acquisitions, pay dividends and buy back shares. These actions benefit the overall economy.
Mortgage payments may be lower
Mortgage rates are based on long-term U.S. Treasury yields. Today, in 2019, mortgage rates are still near historic lows. Low interest rates on mortgages encourage first-time homebuyers to purchase a home. They also encourage current homeowners to refinance mortgages at a cheaper rate. This saves them money on their monthly mortgage payments.
Consumers may be able to finance items more easily
Interest rates for cars, appliances and student loans become very attractive in a low-interest rate environment. Instead of paying off these loans at once, it may be better to borrow at a low rate and invest in equities for a higher rate of return.
Negatives of Low Interest Rates
Savers may make less on interest bearing accounts
Low interest rates provide lower interest amounts to savers whose main focus is the preservation of capital and income. This is because yields on bonds, CD’s and money market instruments are very low.
Some assets may be artificially inflated
Asset prices could be artificially inflated because many investors may turn to higher-yield assets such as Real Estate Investment Trusts (REITs) and Master Limited Partnerships (MLPs). Investors may make more risky investments in search of higher yields.
Banks and lending institutions may make lower returns
Banks and insurance companies are also negatively affected by low interest rates. Insurance companies invest their assets long-term with the assumption of higher rates on their capital. Banks can suffer as their “net interest” margin, or the spread between the rate at which they lend funds and interest they must pay on deposits is compressed.
Takeaway: For 2019, many experts feel that interest rates will continue to be low. The takeaway is to avoid risky investments, stay the course of your financial plan and talk to your advisor when worried.
Let Carnegie Investment Counsel be your guide when it comes to investing in a low interest rate environment.
Research Analyst/Portfolio Management Assistant