The Surprising Decrease of Interest Rates

For some, it’s really great when the interest rates goes down because it’s easier to borrow loans, but for others, the anxiety makes them panic.

 

“There would be a sense of what do you know that we don’t know? And what do you know that’s coming that we don’t know that’s coming? And you could feed into a panic in financial markets and that’s certainly not something you’d want to do at this stage,” Grant Thornton Chief Economist, Diane Swonk, told FOX Business.

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In times of economic downturn, the Federal Reserve lowers interest rates to encourage additional investment spending. When the economy is growing and in good condition, the Fed takes measures to increase interest rates slightly to keep inflation at bay.

 

Just a few months ago in November of last year, the interest rate hit a 7-year high of 4.94 percent. It went down 4 basis points in the past week and dropped to 4.37 percent, which according to Freddie Mac’s latest Mortgage Market Survey data, is the lowest rate in a year.

 

What does this mean?

The interest rates are going down.

Swonk said she “expects Fed Chair Jerome Powell to pivot and move away from delivering a message that suggests further gradual increases in the benchmark federal funds rate.”

“We’ll also see that infamous dot plot where they map out what they’re going to do on the trajectory of rate hikes and that I think will come down to somewhere between 2 and 3 after being firmly at 3 in the month of September” she said.

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The average rate for a 15-year fixed mortgage now has dropped to 3.81 percent. Compared to mid-November last year, it is down 55 basis points, and compared to this time last year, it is 3 basis points below.

The average interest rate for a 5-year adjustable rate loan also went down 3 basis points over the past week to 3.88 percent. Compared to the same time last year, it is 25 basis points above, and7 basis points above the 15-year rate.

In the beginning of the year, people braced for the Federal Reserve’s announcement of three interest rate hikes. However, they’ve had a change of mind and are applying a more “patient” approach because of signs of a global economic slowdown.

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The probability of an interest rate hike this year has now dropped to 2 percent, according to an analysis of the futures market.

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Lowering interest rates is the Fed’s most powerful tool to increase investment spending in the U.S. and to attempt to steer the country clear of recessions. The Fed controls the federal funds rate, which influences long-term interest rates. Changes in interest rates directly affects the public’s demand for goods and services and, thus, aggregate investment spending.

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It is a good thing for most because a decrease in interest rates lowers the cost of borrowing, which encourages businesses to increase investment spending. Lower interest rates also give banks more incentive to lend to businesses and households, allowing them to spend more.

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Sources: SocketSite, Investopedia

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