Wait. Interest rates are low? This isn't what you're hearing on the news.
That's true, but as usual nothing is being adjusted for inflation:
The bank prime rate is currently at about 3%, which means that in real terms it's at -4%. This is why inflation is typically good for the economy. By making real interest rates low, it makes business expansion cheap. If you can get a business loan for a couple of points above prime—which would still be negative in real terms—why wouldn't you expand?
The answer, of course, is twofold. First, you might believe that inflation is transitory and your 5% loan will soon really be a 5% loan. Second, you just might not believe there's going to be more business in the future. If that's the case, there's no point in expanding no matter what kind of loan you can get.
Anyway, this is a good time for inflation hawks to cash in. If you think high inflation is going to last a long time, then buy a house! The 30-year fixed rate is negative when you account for inflation, so it's a huge bargain. And if you're a dove who thinks high inflation won't last very long? Then maybe an ARM is a better choice.
ah.... No. Just no.
'This is why inflation is typically good for the economy. By making real interest rates low, it makes business expansion cheap"
Inflation can be useful within a reasonable band where it allows for a degree of system flexibility for responsive monetary policy and avoiding what we might call the psychological binding effects of the Zero Bound (we must admit the experience with this over the past decade has shown that mathmatically things can work with negative rates, but it remains deeply uncomfortable for real humans).
Stating "is typically good for the economy" is however massively misunderstanding and a dangerous misframing.
Enabling real interest rates to be reasonably low is a generally good thing, however low real rates driven by surprise inflation and a mispricing of real cost of capital due to essentially stickiness of pricing is not a good thing, it is a bloody bad thing. It is how one gets Ghost Cities like in China.
Really your Post is just dangerously and badly misframed.
I figure A lot of this is stimulus driven rapid consumption now with extra debt space from the same stimulus.
The Fed should have been off the zerobound by now.
Not too many people expect the next twelve months to be like the last twelve months, though, inflation-wise. I wouldn't jump at the chance to borrow at 7%.
Glad I already have my home at a very low rate.
Same here - we refinanced back in April 2021 at a nice dip in the interest rates.
"By making real interest rates low, it makes business expansion cheap" is true IF a company could also reverse those plans as quickly as interest rates move. In practice, expansion (people, materials, contracts etc) are medium to long term commitments.
Remember the Prime Rate is a completely artificial rate.
Citi used to set the prime at something like 2 1/8% above Fed Funds but when rates went to low, I think in the Great Recession, they decided to keep the rate at 3.25%.
So now, the rate is set 1% higher than it was 20 years ago.
The other thing is that the "Prime Rate" used to be the Prime Rate. It was the rate that PRIME customers could borrow at. Obviously, bigwigs didn't sit there and let the banks charge an extra 1%. Recently, they borrowed at Prime minus some amount. I had a fixed rate mortgage at Prime -0.75% even before they raised the Prime artificially.
The Prime is a suckers rate. Using it just gets you in trouble and shows your ignorance.