Due to the impact of the COVID-19 pandemic on the economy, interest rates are at a record-breaking low. Though many consumers who are on the market for a home are considering the effect as a positive thing, low-interest rates, unfortunately, have a ripple effect on the financial system. Here, Mike Eisenga, a successful commercial real estate investor with a banking and finance background, goes into detail examining the implications of low-interest rates in the United States economy.
Interest Rates Affect Spending
Interest is the reward that comes for those who give out loans with the risk that they will never get their money back in return. A loan allows for people to spend the money that they borrow now, rather than waiting to save their own money. However, when interest rates are low, people are spending faster because they have less to pay back in the end. This action creates a ripple effect as more and more people in the economy increase the amount they spend in a shorter period of time. The opposite scenario would be when interest rates rise, and businesses and consumers tend to spend less.
Interest Rates Affect United States Stock and Bond Markets
Lower interest rates result in increased spending, which means stock prices have a habit of rising. There is an extensive range of investment options available for investors to choose where they want to put their money. When evaluating investment options and comparing the average dividend yield on a blue-chip stock to the interest rate on a certificate of deposit or yield on a United States Treasury bond, investors often opt for the course of action that will result in the highest rate of return. Certificate of deposit returns and Treasury bond returns are triggered by federal fund rates. This is why smart investors are very aware of the present-day federal fund rates and use these rates to help them decide how and where to invest their finances.
Bond prices are also affected by interest rates. When interest rates increase, bond prices fall, and when interest rates decrease, bond prices rise.
Interest Rates Affect Banks
Higher interest rates provide more security for those who lend money. The standards that banks are requiring are considered aggressive due to the concern in the industry revolving around the prediction that the damage the economy has endured from the pandemic will be long-term. The rates of credit cards are lower than they have been in four years. The rate has fluctuated from 17.85 percent to 16.01 percent, from Bankrate stats. Due to the reality of millions of Americans out of work and feeling the financial pressures as an outcome from the coronavirus pandemic, institutions that issue credit cards are both lowering credit limits and closing accounts. Unfortunately, banks do not have a good grasp at the moment on who is considered a safe borrower and who is a risky one. As a result, the public is seeing banks essentially retreating to the extremely strict requirements that must be met to borrow money.
About Michael Eisenga
Michael Eisenga is a commercial real estate investor, entrepreneur, and proud father of three boys. His wide range of skills includes commercial real estate investing, property management, assisting living facility operation, leadership, strategic planning, public policy, and community outreach. Mr. Eisenga is most passionate about finding and improving profitable investments. Lately, he has been focusing on fueling development in smaller communities through assisting living facilities.