It took me a few days to decide whether to write this column. I've been burned before and of course, no one can predict where interest rates are headed so I certainly won't do that. But it's possible, interest rates are getting poised to get real high, real fast.
Take that with a relative grain of salt. To pointy-head financial geeks like me, "real high" means a percent in fixed rates, or two. I'm not saying we're getting back into double-digit rates like we saw in the last half of the 80's and early 90's, but I personally feel we're back on track for more traditional interest rate cycles we typically experience every few years or so. Rates go up to 8.00 percent for a while, then fall back down to 6.00 percent. Up 2, Down 2 or so.
What has been odd these past four years is that interest rates in general, have gradually fallen over an extended period. Instead of a quick run-up of rates to a particular level only to eventually move back down, we've been witness to an unprecedented and protracted rate drop. Just look at any fixed rate chart since 1998 and you'll see what I mean.
Rates have hovered in the high-fives to low-sixes for quite some time, our economy appeared to be stuck in low-gear. Terrorist attacks, bad economic numbers, and low inflation have kept higher rates at bay. But that could be changing.
Inflation may in fact be a problem. Both recent wholesale and consumer price index numbers have been coming in higher than anticipated. And why not, with oil cruising above $50.00 a barrel. Eventually, the high cost of oil creeps into many things made from petroleum, from the gasoline you use, to the sandwich bags in your kitchen. What's weird to me about the price of oil is that hardly anyone cares. Remember last year when oil hit $40.00? The stock market took a hit, which helped keep fixed rates low. Now it seems that we simply accept it, fill up our tanks, and drive on.
The dollar can't seem to break out of its doldrums as we keep buying foreign goods and can't seem to export our own, no matter how much the dollar slides. Because foreign goods cost more to US buyers, foreign sellers have tried to keep their prices as low as they can to make sales. Eventually, foreign markets are going to have to increase prices to offset the dollar difference. So far, they've been able to hold steady by holding down profit margins. Things will simply cost more, that's inflation, folks.
Durable Goods came in strong again, Non-farm payroll numbers are high, and Weekly Jobless Claims are near four year lows. The Dow has been above 10,000 and holding, the economy looks good.
Oh, and we can't forget Iraq, or Afghanistan. When we invaded Iraq, we extended our recession. Businesses were less likely to put more money into expansion until they felt comfortable that the economy would get back on track both here and abroad. It appears that Afghanistan is functioning well, and we can now say that although there are still problems in Iraq, it looks as if we've won the thing and will soon leave protecting Iraq to the Iraqis.
The war on terror, strong economic data, and signs of inflation. These three horsemen haven't ridden together before, they're riding now... I think we're in for higher rates.
Published: February 25, 2005
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