Will US base rate ever return to normal levels?

The US base rate currently stands at 0.75% which compares favourably to the UK base rate of 0.25% and the Canadian rate at 0.5%. Even though analysts believe that the US base rate will increase during 2017 when will they ever return to “normal levels”. When you bear in mind we are now approaching a decade since the US mortgage crisis led to the worldwide slump, have we now got too used to the low base rate environment?

Low finance costs

While commercial lending rates are nowhere near the US base rate they do still compare favourably to the historic norm. There is no doubt that this low interest rate environment has helped support investment markets such as real estate and the stock market to some extent. When you bear in mind the minimal return on savings accounts it is obvious that more and more people will look towards the investment markets.

Will US base rates ever return to normal levels?
Will investors cope when interest rates rise further?

As this popularity continues to grow so the financial institutions will become more competitive and offer incentives and discounts to customers. Whether or not there is a real danger that we will return to the situation seen prior to the crash is debatable but history does show us that markets do get stretched on the downside and the upside. It is human nature to pursue profits and in theory makes business sense to undercut your competitors as long as you are still making a return.

Base rate will eventually rise

Even though some experts are predicting up to 3 US base rate increases during 2017 this will still not take us anywhere near the “normal rates” of years gone by. However, a potential doubling of rates to around 1.5%, for example, would significantly increase the finance costs of debt taken out by many investors. If they were pushing their financial limits when they originally took out these low cost loans we can only estimate how many will struggle as US rates move higher?

The problem is that as and when finance costs do rise this will push some people towards liquidating their assets to cover their liabilities. What could start as a trickle may very quickly end up as tidal wave of potential sellers looking to bank profits as prices top out. This scenario could pan out in the real estate market, the stock market and indeed any other investment market where debt has been used to fund investment.

Will the authorities step in?

We can only hope that the authorities in the US and around the world have learned their lesson from years gone by when greed was considered good and many mortgage companies took on business at minimal profit margins. While the US depression of the 1920s may be long gone and out of the memory of investors the depression of a decade ago is not. However, human nature also dictates that some investors will ignore lessons which should have been learned a decade ago and continue to pursue their ultimate goal of capital gains at any cost.

Whether the authorities will “allow” the situation to get as bad as it was a decade ago remains to be seen – we can only hope that lessons really have been learned.

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