Waiting for Interest Rates to Rise

Interest rates are at all-time lows. They will rise someday -- likely when the economy recovers.

Why they do, two groups could be caught off guard:

  • Individual investors, who have been plowing money into bonds for the last four years. (Remember, bond prices move inversely to interest rates).
  • Big banks like Citigroup (NYSE: C  ) and JPMorgan Chase (NYSE: JPM  ) , which own a lot of Treasury debt and derivatives tied to interest rate moves.

So the question is, when will interest rates rise?

No one knows, but history tells us loud and clear that the moves could be sharp and out of the blue. Rarely is it a slow crawl upwards. 

Two weeks ago, I sat down with John Taylor, a Stanford economist, former Treasury official, and former advisor to Mitt Romney. I asked him about the history of interest rate moves. Here's what he had to say (transcript follows).

Morgan Housel: Interest rates are near 0% today. They won't stay there forever. The question of how they get back up, do you think it'll be a slow crawl back up or is it going to be a leap back up that's going to take people, and especially banks, by surprise?

John Taylor: Well they'll definitely be a surprise. Even a gradual one will be a surprise because in history, the most difficult thing in central banking to me is really when to withdraw if you like the stimulus and how to create a soft landing, sometimes it's called. And it's the most difficult thing because the instruments are not perfect. The channel from say the Federal Funds rate to the economy is very uncertain. There's always political pressures or judgment calls. In fact it's been rare where we've been unable to avoid if you like the boom-bust and have really a smooth growth and I think the eighties and nineties were really examples where we avoided much of the boom-bust, but it's hard. And that's why I come back at that kind of policy, is where we should try to focus. Not exactly; the world is different, but that kind of steady as you go where people can anticipate. And even if you can see rates are moving up, if you can anticipate that, it's going to be much better than surprise increases.

Morgan Housel: But the history of interest rates definitely supports the leap higher rather than the crawl higher, does it not?

John Taylor: Absolutely, yeah.


Read/Post Comments (0) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2166702, ~/Articles/ArticleHandler.aspx, 10/28/2016 7:56:16 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated Moments ago Sponsored by:
DOW 18,161.19 -8.49 -0.05%
S&P 500 2,126.41 -6.63 -0.31%
NASD 5,190.10 -25.87 -0.50%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

10/28/2016 4:00 PM
C $49.56 Down -0.37 -0.74%
Citigroup CAPS Rating: ***
JPM $69.11 Down -0.12 -0.17%
JPMorgan Chase CAPS Rating: ****