Interest Rates News – Richmond Fed president expects them still to rise

Interest rates are one of the most important numbers for people to watch when thinking about money. These rates are used as the basis for all loans and credit in that the rate will be higher than this in most cases. Interest rates at your bank account will usually be lower, or close to this rate. The president of the Richmond Fed, Tom Barkin, thinks that they need to rise to “normal” values.  He did not elaborate what normal is.

Here is the data going back to 1964. The problem with defining normal is that the chart is a standard bell chart with rates highest during the Stagflation era of the 1970s to early 1980s.  If you ignore the data 1970s and 1980s when we had the high inflation and recovered from it in the 1980s, then I have to say that I think the normal in the 1960s and 1990s to now is somewhere between 2% and 6%, where I will call normal as about 4%.

I found this link to describe very nicely what the fed rate in terms of a definition and a number As of this writing in August 2018, it’s set to 1.5%.  My understand of what this Fed president is suggesting is that it will grow slowly so as not to spook the economy to a number closer to 4%.  He said in his speech that economic growth, and I suspect inflation although he did not say that, together will help determine what the rate will be.

At the moment, the article goes on to say, that the Fed is planning 2 more rate hikes this year, and 3 more next year. All of them may not happen due to reasons you might expect, trade or shooting wars, market volatility, and even the effect of previous rate hikes.

This is one reason why I look for high yield savings accounts for my emergency fund.  I also buy series I bonds from the government.  Each citizen can buy $10,000 per year in bonds, and put up to an additional $5,000 a year in paper bonds via your tax return. They are guaranteed to be at inflation plus a little bit.  In my experience they are close to what inflation is, and often better. The issue is in the way that the government calculates the inflation rate.  They calculate it with a certain weight to certain items, and your personal inflation rate may vary. For instance, they expect the average person may spend a certain percent of their income on gasoline, and you may spend more or less depending on your driving habits.  You may be more or less sensitive to changes in gasoline rates than the average person.

So while I am a fan of I bonds and high yield savings accounts, you must also pick a bank you trust.  You might also consider buying a home or car sooner rather than later in a rising interest rate environment.  You also want to pay down credit cards faster in such an environment.  You may not want to pay down low interest loans in that environment.

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