The Intellectual Investor: The Impact of Higher Interest Rates on the Economy
From late 2008 to late 2015, the Federal Reserve set its interest rates at zero percent. This long period of low rates has been called financial repression.
One impact that this had was to help ease the banks following the 2008 meltdown. For savers and investors, however, it meant that savings earned no interest. Given that inflation was still positive over this period, investors who wanted real returns had to take on risk.
The end result? Investors were pushed into riskier assets.
Today, the reverse has been the case. Interest rates rose at their fastest pace in 40 years in 2022 and 2023. And rates are still closer to that high, even with rates coming down.
This has caused a number of effects. First, for savers, it means they’re earning a real positive return on their money. Inflation is under 3% annually now, but savings rates are closer to the 4-4.5% range.
However, this rising cost has resulted in soaring government borrowing costs. That’s because most government funding has been made through sort-term bills and notes. When a 2-year bond from 2021 rolled over from 0% to nearly 5%, the costs soared.
These higher rates can clearly have an impact on economic growth. And we may see those costs hit the economy and the stock market in 2025.
