Kelly Evans: What are interest rates REALLY?

Kelly Evans: What are interest rates REALLY like?

For all the hype surrounding each Federal Reserve meeting, the thing that is strangely important to the economy is not exactly the level at which it sets interest rates, but rather where rates compare to inflation and the economy's "neutral" policy level. .

The first comparison is one we can make directly. The whole reason the economy went into disarray during this time wasn't just because the Fed pulled rates to zero; it was because rates fell to zero while inflation soared to 9%. This meant in "real" terms that interest rates were not zero; they were sharply negative, extremely

into the economy.

Think about it: if you can borrow money for zero and your sales are growing at 9-10% thanks to high inflation and some real growth, that's a pretty juicy opportunity - not really. This is why we saw tons of new business formations and start-up booms during the pandemic as capital flooded into companies that had seemingly "certain" growth and business models.

Now the opposite is happening. The Fed raised rates to nearly 5.5%, but inflation fell to just 3.2%. Now, as a business owner, if you have to borrow at say 6% but your top-line is only growing 3-4%, you're screwed. So the start-up boom is turning sharply. US bankruptcy

Think about it: if you can borrow money for zero and your sales are growing at 9-10% thanks to high inflation and some real growth, that's a pretty juicy opportunity - not really. This is why we saw tons of new business formations and start-up booms during the pandemic as capital flooded into companies that had seemingly "certain" growth and business models.

Now the opposite is happening. The Fed raised rates to nearly 5.5%, but inflation fell to just 3.2%. Now, as a business owner, if you have to borrow at say 6% but your top-line is only growing 3-4%, you're screwed. So the start-up boom is turning sharply. US bankruptc

but whether this level is restrictive enough. It certainly was in 2010, when real rates were rarely above 0.5% and yet the economy struggled to sustain growth after the financial crisis. But is it restrictive enough now? If you take the message from the leading indicators (which remain negative) and the inverted yield curve, yes. If you ignore them and focus on current data like jobs and GDP, you think the answer is no.

And in a sense, the stock market has become a kind of unofficial arbiter of it all. The last time real rates were in the 2% range was in the mid-2000s expansion before the financial crisis hit. At the time, the stock was trading at an average of just 15 times forward earnings. Fast forward to the present and stocks are shrugging off these higher real rates altogether. The S&P 500 rallied nearly 20x earlier this year and now trades around 18.5, notes.

Perhaps this is justified, the bulls argue, because new innovations like artificial intelligence are so deep and productive that the biggest stocks trading at high valuations deserve the premium they've been given. If so, it certainly gives the impression that the economy may now need more restrictive real rates than before to really cool things down.

Or maybe we'll be scratching our heads a year from now when the S&P returns to a more "normal" valuation and the days of 5.8% GDP prints (if we even get it this quarter) are a distant memory. Only then will we know if these 2% "real" rates were really high enough.

 Interest rates play a key role in the global economy, affecting everything from mortgages and car loans to savings accounts and investment returns. Few people in the financial world are as adept at dissecting this complex topic as renowned journalist Kelly Evans. In this insightful article, we delve into the question on everyone's mind: What are interest rates really like? Join us as we unravel the mysteries of interest rates and gain a comprehensive understanding of their impact on our financial lives.

Basics of interest rates

Before we dive into the complexities, let's lay down the basics. Interest rates are the cost of borrowing money or the return on invested capital. They are set by central banks and can fluctuate based on various economic factors. Whether you're a borrower, saver or investor, understanding interest rate dynamics is essential to making informed financial decisions.

Kelly Evans: Office of Financial Affairs

Kelly Evans, a prominent financial journalist and presenter, has spent years deciphering complex economic concepts for the general public. Thanks to her extensive experience and thorough analyses, she has become a trusted source of financial information. Evans' ability to break down complex topics like interest rates into digestible chunks is unmatched.

The effect of interest rates on borrowing and saving

When interest rates rise, the cost of borrowing rises. This applies to individuals looking for mortgages, car loans or personal loans because they end up paying more in interest. On the other hand, savers can rejoice when rates rise because they can potentially earn higher returns on their savings accounts and certificates of deposit.

Investment strategies in a changing rate environment

Investors must also navigate the ever-changing interest rate environment. Bonds, for example, experience an inverse relationship with interest rates. When rates rise, bond prices typically fall, and vice versa. Kelly Evans provides valuable insight on how investors can position themselves to take advantage of these fluctuations and optimize their portfolios.

Global economic factors and interest rates

Interest rates are not determined in a vacuum; are influenced by a number of global economic factors. From inflation and unemployment rates to central bank policy and geopolitical events, a number of variables contribute to the decision-making process. Evans' adept analysis helps individuals connect the dots between these factors and their impact on interest rates.

Planning for the future with Kelly Evans' Insights

In a world where financial decisions have far-reaching consequences, Kelly Evans' expertise becomes an invaluable asset. Her ability to clarify complex financial concepts equips individuals with the knowledge needed to make sound decisions. Whether you're a first-time home buyer, a seasoned investor, or someone looking to grow their savings, Kelly Evans' insights provide a blueprint for navigating the complex world of interest rates.

Few topics in finance are as compelling and widely debated as interest rates. With Kelly Evans as our guide, we set out on a journey to uncover the truth about interest rates. From their fundamental nature to their far-reaching implications, Evans' insights enable us to make informed decisions in a dynamic financial environment. As we continue to navigate the complexities of the global economy, we can count on experts like Kelly Evans to shed light on the question: What are interest rates really like?

In the world of finance and economics, interest rates play a key role in shaping economic trends, consumer behavior and investment decisions. However, many individuals struggle with the true nature of interest rates and their impact on various aspects of the economy. In this insightful guide, renowned financial journalist Kelly Evans takes us on a journey to demystify the concept of interest rates, providing a comprehensive overview that sheds light on their meaning, the factors that influence them and the implications they have for both individuals and the wider economy. .

Understanding Interest Rates: The Basics

Interest rates are essentially the cost of borrowing money. They are expressed as a percentage and reflect the compensation that lenders receive for lending funds to borrowers. Kelly Evans explains that these rates are critical indicators that affect a wide range of financial activities, from mortgage rates and credit card fees to savings account yields and investment returns.

The Role of the Federal Reserve System

A key player in determining interest rates is the Federal Reserve, often referred to as the Fed. Kelly Evans points out that the Fed uses interest rates as a tool to manage the economy. When the economy is booming, the Fed can raise interest rates to curb inflation and prevent excessive borrowing. Conversely, in times of economic slowdown, the Fed may cut rates to encourage borrowing and stimulate spending.

Factors affecting interest rates

Kelly Evans delves into the myriad factors that influence interest rate decisions. These include: Inflation: Interest rates are closely tied to inflation as lenders look to compensate for the declining purchasing power of their money over time. Higher inflation usually leads to higher interest rates. Economic conditions: Strong economic growth often leads to higher interest rates, while a weak economy can lead to lower rates to encourage lending.

Central Bank Policy: As mentioned earlier, a central bank such as the Federal Reserve plays a key role in setting interest rates to achieve economic goals. Global factors: Global economic conditions, geopolitical events and exchange rates can also affect interest rates.

Impact on consumers and businesses

Kelly Evans explains that interest rates affect both consumers and businesses. For consumers, fluctuations in interest rates can affect mortgage payments, credit card interest rates and savings account returns. On the business front, interest rates influence borrowing costs, which in turn influence expansion plans and investment decisions.

Investment strategies in a changing rate environment

Investors, whether individuals or institutions, must be attuned to changes in interest rates. Kelly Evans recommends diversification as a strategy to mitigate the risks associated with interest rate fluctuations. Bonds, stocks and real estate react differently to changing interest rates, and a balanced portfolio can help investors navigate uncertainty.

Interest rates are at the heart of the financial world and have a profound impact on economies, markets and individual financial situations. Through the expert insights of Kelly Evans, we set out on a journey to uncover the true nature of interest rates. Armed with this comprehensive understanding, readers can make informed decisions about borrowing, investing, and planning for their financial future in a dynamic economic environment.