A Recap on Interest Rates

I just checked the figures for the last couple of years. The US interest rate has gone from a low of 1% at the beginning of 2004 to the current level of 3.75%. In the intervening months, we have had a series of small incremental increases without any sign of a reduction.

We are over the 2% increase mark in just less than a year and a half. Why would this be significant? Well, many analysts say that once interest rates have climbed over 2% from a "low mark", a housing market correction begins.

While we aren't seeing a US-wide correction, we are starting to see some regional markets which are starting to fall. I'm starting to think that we are going to see more of this, especially with the inflation impact of the hurricane season this year. Housing materials are way up in price because of the demand caused by rebuilding in the gulf. Of course, our gas and oil are up. (Have you seen the projected costs for heating? It looks as if most of us will be looking at 50 - 100% increases in the cost of heating our homes. Now THAT'S a big bite to swallow -- especially if your income isn't going up in step with the oil and gas prices.) If the cost of living is on the rise, and interest rates are on the rise, something will have to give -- or people will have to stop buying homes, or even pull out of the housing market.

Inflation is obviously giving the Fed nightmares. Anyone besides me old enough to remember double-digit inflation in the 80's?

But what scares me more right now is this: what if our beloved Fed is over-reacting? What if all of us over-extended consumers stop consuming? While we obviously have to reduce our debt as individuals and as a nation, it's better if that happens at a measured rate. If we all stop buying now, that could make the upcoming few years an even more difficult ride, and could give our economy a serious body blow. The upside? So far, the economic engine of the US is still purring along, and we don't show too much sign of nervousness yet.

Let's hope the sunny outlook remains, despite hurricane season.

Michael

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