Readers Question: If long term Interest rates in the US do not fall, how will this impact the US economy?
Short Term Interest rates are governed by the Fed’s Current monetary Policy. These have fallen sharply in recent months from 4.25% to 2.25%. This reflects the Feds desire to avoid an economic downturn. The sharp cut in rates is an attempt to reflate an economy reeling from falling house prices, financial insecurity and lower economic growth.
Long Term Interest Rates involve interest rates on securities such as 30 year bonds. With long term bonds, the interest rate tends to reflect the markets long term expectations of inflation. They tend to be less volatile than short term rates.
If markets expect inflation to rise, bonds become less attractive to hold and therefore investors require a higher interest rate to make it attractive to buy.
Difference between Short Term and Long term interest rates in the US.
To see the difference between short term and long term interest rates view this table at the US Treasury
What are the Effects of higher Long Term Interest Rates?
- It is more expensive for Government to finance its National Debt. In forthcoming years, the US government will have to borrow more; long term interest rates are a guide to how much it will cost to finance the National debt.
- Higher interest rates will at least continue to attract investors to buy US securities. This will help increase demand for dollars and prevent a depreciation in the dollar.
- Long term interest rates don’t affect the average consumer as much as short term rates. For example, it is short term rates that have most influence over bank loan rates and mortgage rates.
- There is probably more to it than this. But, that’s all I can think of at moment.