The Price of Money

Are higher interest rates good or bad?

That’s a good question. Since Ben Bernanke’s press conference three weeks ago interest rates have moved sharply higher. Some note that higher interest rates make it more expensive to borrow and conclude that these rates will make it more expensive to borrow money and put the economy at risk. Others note that higher rates result from a stronger economy, and so they should presage good things to come. Which is it?

Interest rates can be seen as the price of credit. When they’re low, there’s too much supply chasing too little demand, and credit is cheap. Conversely, when they go up, demand is outstripping supply. Since 2008 the Fed has been injecting huge levels of credit into the banking system, but now they’re intimating that the economy is strong enough that monetary spigots may dry up. Friday’s employment number confirmed that the labor market is getting better.

This is a good thing. A stronger US economy means that consumers and businesses are demanding more credit, and the clearing price needs to rise. Higher prices that result from an increase in demand are sustainable.

This question arises every time the economy comes out of the doldrums: will higher rates push it back down? It came up in 2003, and before that in 1994. If history is any guide, the answer is, “no.”

Douglas R. Tengdin, CFA

Chief Investment Officer

By | 2013-07-10T09:48:19+00:00 July 10th, 2013|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. - Leave a comment if you have any questions—I read them all! - And Follow me on Twitter @GlobalMarketUpd

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