Are We Sure We Want Lower Rates?
American consumers want cheaper debt, nicer homes, and newer cars. The drumbeat is constant, from Wall Street to cable news. It seems everyone wants lower rates. But let’s pause to ask, “Are we sure we want lower rates?”
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Interest rates move with inflation, and inflation has been stubborn. We see it at the gas pump and on our grocery receipts. Inflation is not done either. It was already drifting higher before the conflict with Iran pushed oil prices up. In any other era of the last half-century, this would be where the economy buckles. Every U.S. recession since the early 1970s, from the OPEC embargo to 2008, was preceded by an oil-price spike. Oil is the bloodstream of a modern economy.
This time, the U.S. economic heart is still beating despite inflation. Why?
America is once again a major energy producer. Fears that the world would run out of oil sparked decades of innovation. Today, the United States is the largest energy producer in the world, pumping roughly 13 million barrels of crude per day, accounting for just under 13% of global demand. We have rewritten the playbook.
Old playbook: Higher oil meant higher inflation, which forced rates up, which slowed the economy, which eventually pulled rates back down.
New playbook: Higher oil prices still mean higher inflation, but they no longer mean the whole economy slows. Energy-producing regions actually benefit, inflation stays stubborn, and rates settle into a different scenario: “higher for longer.”
The Federal Reserve is tasked with maintaining stable prices, which it defines as 2% inflation. The Fed has missed this target for six straight years. Seventy-two consecutive months above target. Zero wins. The Fed’s rate changes simply have not had enough impact.
Here is the part most people miss. Who oversees the rates that matter to households, the 5-year and 10-year rates that drive mortgages and auto loans? It is not the Fed. The Fed has been lowering its rate while other rates have been rising. Why? Investors.
Bond investors want to beat inflation, plus a little extra. No press conference and no rate cut can override that arithmetic. If you want lower rates, you must convince investors that inflation is coming down.
So, the next time you think, “We need lower interest rates,” translate it to, “We need lower inflation.”
Until then, here is the optimistic part. America has so far absorbed an oil spike without flinching. Higher interest rates are the result of a stronger, more resilient economy, one that no longer needs zero-percent money to stand up straight.
The real question we should be asking is, “What should we do with our money in a world where rates are not going back to zero?” That is what our efforts at SFS are all about, and that is where prosperity will be earned.
