A lot of recent financial news has focused around the spreading European sovereign debt crisis. The big question many Americans now try to answer is what this means for them on a day-to-day basis.
At the same time as this is occupying financial headlines, the Fed has declared that they will endorse a policy of more transparency, opening up their forecasts to scrutiny and understanding from market observers. Due to continued slow job growth and stagnant real estate market, the Fed claimed that they will keep the federal funds rate (the rate at which banks lend to each other overnight) low throughout 2014 to spur economic growth (hopefully). This decision has not been met without controversy, especially among inflation hawks who believe that expansionary monetary policies such as these will lead to future inflation. Due to the deleveraging that has occurred in the credit industry as well as general asset deflation, this effect has not been seen yet; inflation continues to remain at a relatively low level.
Still worried about Greece?
In the flight to the relative safety of Government debt, yields are generally pushed downward as bonds and treasury notes increase in price (price and yield move in opposite directions). The European sovereign debt crisis has spurred what many believe is a flight to safety, pushing bond yields and treasury yields even lower in perceived 'safe' countries. This has affected the long-term yield curve of those entities, shifting them downward. In the US, fixed rate mortgages are hitting historical lows. For comparison’s sake, rates peaked at around 18.63% in the early 80s coming off late 70s stagflation and the oil embargo. At the same time as this flight to safety, the purchasing of short-term bonds by the Fed pushed the shorter end of the yield curve downwards. This massive shift of money toward both short and long term bonds has caused interest rates, in all forms, to hit historical lows. This manifests itself in magnificent credit card rates (short term cost of funds), mortgage rates (long term cost of funds) and auto loans (medium term cost of funds), as well as other intermediary installment loans. This offers great flexibility in rates and products to borrowers. Refinancing rates are remarkably low (as are home equity loans), reflecting the deleveraging occurring throughout the country.
So is this all positive? Of course not, quite the contrary, in fact. The key is to find the silver lining. The reasons for some of the low rates and low inflation is due to a lessened economic outlook: a potpourri of conditions including slower-than-expected job growth, a weaker-than-expected real estate market and a continuously-widening fiscal debt load. These conditions are not going away and could be signs of endemic issues in the American economy. Of course, as long as interest rates are low, it is important to consider the benefits of personal leverage (weighing building up assets before paying down debt you currently have).
Cheers,
Cameron Daniels
