How do Interest Rates Impact the Consumer?

By Michael D'Ambrosio | December 2, 2021

Interest rates are a call for concern and of high importance to consumers in our society. Interest Rates are essentially the cost of money. In larger terms, interest rates are more appealing when rates are lower. The reason is when consumers make bigger purchases, they will pay less in interest, thus giving them more money to spend. When there is more spending, it creates a ripple effect in our economy. From the start of the pandemic, interest rates have been at rock bottom, as the Fed put rates to near 0%. This was a necessary move by the Fed as it encouraged spending to prevent the economy from suffering. All this spending helped to lead to massive back order in the supply chain, which prevented the availability of many goods. The absence and inaccessibility caused high inflation in our economy, as it’s currently around 6%. Inflation and interest rates do not fluctuate naturally together; the Fed’s policies since the start of the pandemic have caused large disparities between the two. However, this is not the case at the moment. Rates are still incredibly low; most specifically, the US long-term interest rate is at 1.3%, which is the lowest it’s been in years. Similarly, the rate to purchase homes is very inexpensive in comparison to decades prior. The 10-year treasury rate, which contributes heavily to mortgage rates, is currently at 1.6%. A 30 year fixed mortgage currently sits at around 3% and has dipped below the 3% line several times during this year. This is a big difference from the past decade as rates were in the range of 4% to 6%. The reason why inflation is high and rates are low are because of the insane influx of cash in our society. Since the start of the pandemic, the US government has spent $5.4 trillion through fiscal policy, and the Fed has added $4.3 trillion to their balance sheet. All of this money spent on people by government entities has allowed many Americans to save because there is an estimated $2.3 trillion in excess savings. To continue, the Fed is still buying back debt obligations; from the start of the pandemic, they purchased $80 billion of Treasury securities and $40 billion of agency mortgage-backed securities (MBS) each month. All of this was done to create less of a frenzy in our economy. Rates will eventually bounce back up, but the low rates are here to stay at the moment. It looks as if the Fed won’t be raising long-term and short-term interest rates until 2023, so this can result in insane upside potential for investors. People are able to spend more freely and not have to pay an additional cost on their return. High inflation and low rates will still be in effect for some time, but once the Fed cuts back on paying debt and lessening relief bills, interest rates will rise, and our economy will begin to move towards a normal state. At the moment, the consumer is benefiting from low-cost borrowing and a booming financial sector. However, I feel inflation and rates will be back to normal numbers as our society makes a shift back to normalcy and the pandemic moves to a close.

Edited by Zachary Elias