Low interest means easier loans but also causes investor reluctance, says Dennis Dachtler, Sacramento based wealth manager and founder of Dachtler Wealth Management. Here, Dachtler answers questions about interest, inflation, and how these factors affect investments.
Q. Who determines interest rates?
The Federal Reserve, also known as just The Fed, decides on interest rates in eight mini-sessions scheduled throughout the year.
Dennis Dachtler, Sacramento based wealth manager at Dachtler Wealth Mangement | 2130 East Birdwell Street | Folsom, California | 800.333.1855
Q. Why do low interest rates affect the national credit market?
Basically, the lower the interest rate, the less expensive it is to borrow. Lower interest rates go a long way in persuading buyers to do things like purchase a new home.
Dennis Dachtler, Sacramento based wealth manager at Dachtler Wealth Mangement | 2130 East Birdwell Street | Folsom, California | 800.333.1855
Q. If lower interest rates mean more consumer spending, does higher interest have the opposite effect?
Usually, yes. When it costs more to borrow, buyers are more likely to forgo major expenses.
Dennis Dachtler, Sacramento based wealth manager at Dachtler Wealth Mangement | 2130 East Birdwell Street | Folsom, California | 800.333.1855
Q. Why does the The Fed change rates so often?
Essentially, they are trying to balance the economy. By lowering interest rates, they can stimulate buying, which in turn causes a positive shift in areas such as the job market. More people working means more money in the system. More money in the system helps to bolster inflation rates.
Dennis Dachtler, Sacramento based wealth manager at Dachtler Wealth Mangement | 2130 East Birdwell Street | Folsom, California | 800.333.1855
Q. But, isn’t inflation a bad thing?
Not at all; we need inflation otherwise we would have a stagnant economy. Without some cost of living increases, nothing would ever change.
Dennis Dachtler, Sacramento based wealth manager at Dachtler Wealth Mangement | 2130 East Birdwell Street | Folsom, California | 800.333.1855
Q. Aside from inflation, what other reasons does The Fed consider when altering interest rates?
In times of financial crisis or uncertainty, the Federal Reserve may elect to lower interest rates to boost consumer confidence and inject money into a weak economic system.
Dennis Dachtler, Sacramento based wealth manager at Dachtler Wealth Mangement | 2130 East Birdwell Street | Folsom, California | 800.333.1855
Q. How does inflation affect investments?
If inflation rates are too high, it can cause a growing investment to appear better than it is. Basically, the inflation could be the reason for the growth, at least in part. The portion of the increase caused by the inflation may “inflate” the investment’s performance rates. Also, investors are less likely to invest if there is not enough of an inflation rate to raise interest rates since they will earn a lower return on their funds.
Dennis Dachtler, Sacramento based wealth manager at Dachtler Wealth Mangement | 2130 East Birdwell Street | Folsom, California | 800.333.1855
Q . What causes inflation?
Supply and demand in all markets dictate inflation rates. Take the real estate market for example. When there are more buyers, prices tend to rise. Fewer buyers than available properties and values tend to decrease.
Dennis Dachtler, Sacramento based wealth manager at Dachtler Wealth Mangement | 2130 East Birdwell Street | Folsom, California | 800.333.1855
Q. What about cost-push inflation?
Cost-push inflation, or inflation driven by higher production and wage costs, happens when it costs more to produce an item so there are fewer products being produced. When this is widespread, inflation happens. That is, the products cost more and there are few of them to go around.
Dennis Dachtler, Sacramento based wealth manager at Dachtler Wealth Mangement | 2130 East Birdwell Street | Folsom, California | 800.333.1855
Q. How have interest rates been looking in 2012?
Interest rates have been at almost all-time lows this year. In fact, we haven’t seen rates this low – like the recently yielded 1.6% – since WWII.
Dennis Dachtler, Sacramento based wealth manager at Dachtler Wealth Mangement | 2130 East Birdwell Street | Folsom, California | 800.333.1855
Securities and investment advisory services are offered solely through Ameritas Investment Corp. (AIC). Member FINRA/SIPC. AIC and Dachtler Wealth Management are not affiliated. Additional products and services may be offered through Dennis Dachtler, Heather Dachtler or Dachtler Wealth Management that are not offered through AIC. The opinions and views stated in this publication are solely those of Dennis Dachtler and Heather Dachtler and should not in any way be considered to be an endorsement by Ameritas Investment Corp.
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