Low interest rates have been the bane of savers, retirees, pensioners and many others for a number of years now. With interest rates on the verge of rising, these folks are starting to breathe a sigh of relief.
But rising interest rates are a double-edged sword, and are unlikely to provide as much benefit as many people expect. To understand why, we need to look at why interest rates are rising, and also understand the potentially negative side effects.
Much of our discussion today is going to focus on the chart below. This chart shows the annual inflation rate as measured by the Consumer Price Index in blue, and the yield on the 10-year Treasury in red.
The first thing to notice is that there is a strong correlation between inflation and interest rates. This should come as no surprise since anyone who is lending money wants to make sure that they’re adequately compensated for the expected loss in purchasing power (inflation).
This post was published at FinancialSense on 11/01/2016.
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