Deep Knowledge Investing: Putting Today’s Interest Rates in Perspective
Interest rates have hit their highest levels since the mid-2000s. Mortgage rates topped 7.2 percent recently, a 25-year high that’s keeping potential buyers out of the market. It’s also keeping potential home sellers from moving, given that the rate of the average mortgage is 3.6%.
The Federal Reserve has hiked interest rates at its fastest pace in 40 years. However, coming off of zero percent interest rates, the current rate of 5.00-5.25 percent isn’t that high historically.
Looking at the post-World War II era, interest rates are just now moving into territory slightly above their historical average. Rates have been 4.6 percent on average, going back to 1954.
The Fed’s goal in raising interest rates was to slow down the economy. The measure for that is the drop in inflation. When the Fed started raising rates, inflation had soared to 40-year highs, topping out at over 9 percent.
The Fed has suggested that it may need to raise rates further. However, chances are the central bank is near its peak.
Investors who buy bonds now, particularly long bonds, could benefit in the next year or two as interest rates peak and then start to decline. And right now, with investors pricing in a recession next year, investors can buy short-term Treasury bonds for higher yields than longer-dated ones.