Why Interest Rate Drops May NOT Be a Good Thing

In This Article

In a recent post on our forums, one of our members noted that she was hoping for a major drop in [tag]interest rates[/tag] from the [tag]Federal Reserve[/tag]. Richard Warren, one of our resident bloggers and real estate geniuses had a great bit of insight on the situation that I thought merited sharing:

Don’t be so quick to hope for lower rates. A simple law of physics states: Every action has an equal and opposite reaction. Lower interest rates from [tag]the Fed[/tag] will lead to lower rates on investor [tag]savings[/tag]. It will also cause an already weakened dollar to fall even further. This, in turn, will cause the cost of imported goods to rise. The major import is oil. After the last rate cut the price of oil hit the $100/ barrel mark. How much do you want to pay for gas? Lower [tag]short-term rates[/tag] will lead to higher inflation. This will cause long-term interest rates to rise taking mortgage rates with it.

The Fed has to play a very dangerous game with interest rates. It is a balancing act. The primary purpose of the Federal Reserve is to provide liquidity to the markets, everything else is secondary to that. If they stray too far from that purpose very bad things can occur.

Any thoughts on this one?

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.