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The Trouble With Keeping Interest Rates Low - Avatar Associates

Posted by Seton McAndrews | CFP®, Vice President Investments
May 24, 2012

Avatar Associates' May commentary reviews their portfolios and takes a look at the effects of continued low interest rates. "The Fed is certainly aware of the problem of low interest rates for lenders. Outside the Fed (and likely within it) this is referred to as a policy of interest rate "repression." Historically, we have not had to be as concerned about this problem because, obviously, interest rates have never been this low. But we think the challenge today has become as serious for the Fed as its concern about borrowing costs. It represents another element that is stirring under the surface of monetary policy choices. As we have argued in the past, there will come a time when the Fed will probably have to declare an end to the "emergency." That will result in some sort of "normalization" of monetary policy which, in turn, will have mixed consequences. Higher rates will hurt borrowers and maybe business activity. But higher rates will also signify that the economy is strong once more.  For lenders, their interest income will rise and that will have some positive consequences. Unfortunately, as well, the flip side is that bond prices will decline with those higher interest rates. So the asset value of the bond holdings will depreciate."

Click here to read the full Avatar Associates report.

Avatar Associates