My take on interest rates.
They’re not coming down any time soon. And they’re only going to come down in one situation.
Why are they not coming down soon?
It’s not just because inflation isn’t quite whipped yet.
It’s because the Fed realizes interest rates were too low for too long and caused all kinds of economic problems.
Namely the Everything Bubble, ballooning inequality, and the housing affordability crisis.
Plus, the Fed tried for years to “normalize” interest rates, but could not because Wall Street had a conniption whenever rates went up a smidge.
Inflation finally gave the Fed the cover to do what it wanted to do for years.
There’s nothing inherently good for investors about low interest rates. Smart investors can make money in any historically normal interest rate environment.
If you’re over 40, you remember people thinking 6% mortgages were incredibly cheap. And real estate investors making plenty of money when mortgage rates were 8% and above.
High interest rates are good because they keep people from doing stupid stuff.
After all, are you really going to invest in a C-class value-add deal at a 4% cap rate when you can stick your money in a savings account for 5%?
A real risk-free rate of return makes people think twice before putting their money into the next best thing.
This is good for the economy. And the Fed knows this. They will keep rates higher, to create a meaningful risk-free rate of return, unless the following happens:
A real economic meltdown.
That’s what it will take for rates to come down in any meaningful way.
Yes, if there is a mild recession, the Fed might cut 25 basis points to do some lip service.
But absent a real crisis like the GFC or Covid, the Fed isn’t cutting rates drastically again.
I’m sure some of you will disagree.
And some of you may need the Fed to lower rates drastically because you did deals that depended on low interest rates continuing forever.
Don’t hate me – I’m just calling it as I see it.
Some people will take their lumps. It always happens when the market reverts to the mean.
But the process will also create a lot of opportunity for those who are ready to take advantage.