Are You Watching What Interest Rates Are Doing?

For many people, the mention of interest rates probably causes their eyes to glaze over. Certainly there are some interest rates that most people pay attention to.

Mortgage rates, for instance, are important to people looking to buy a house or refinance a mortgage. Many savers are interested in the interest rates on their savings accounts, or the amount of yield they might get from buying T-bills or I-bonds.

But how many people pay attention to things like the 10-year Treasury bond interest rate, or the spreads between 10-year and shorter-dated Treasuries that make up the yield curve?

These are perhaps mostly observed by financial institutions, professional traders, or other finance professionals. And if you’re particularly interested in knowing what’s going on, there are publications like Grant’s Interest Rate Observer that delve into the nitty gritty of interest rates.

But, you may ask, why should I care about interest rates?

Let’s find out.

Key Takeaways

• Interest rates on 10-year Treasuries have risen even while the Fed has been cutting rates
• The 10-year/2-year yield curve is no longer inverted
• Yield curve inversions and then reversions are considered a leading indicator of potential recessions

The Importance of Interest Rates

Interest rates aren’t just a number pulled out of the ether. They’re a price, the price of money to mainstream economists or the price of time to Austrian School economists.

If you’re looking at the market to borrow money, interest rates and the time period of a loan determine how much money you’ll pay back when you take out a loan.

If someone is looking to lend money, interest rates indicate how much return they might make, giving an indication of whether it might be worth their while to forgo the use of their money for a given period of time rather than potentially using their money in the present.

Interest rates are some of the most important prices in the economy, influencing business decisions among individuals and businesses around the world. Yet their importance is almost criminally underappreciated.

Manipulation of interest rates through monetary policy impacts the working of the economy, in both the short-term and the long-term. Yet the inability to understand that impact, the result of economic beliefs such as the neutrality of money that inform central bank monetary policy today, can lead to devastating results as business cycles move through periods of boom and bust.

The Federal Reserve and Interest Rates

The US central bank, the Federal Reserve System, impacts interest rates in the economy through its conduct of monetary policy. In fact, the Fed’s mandate is to “promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates” (emphasis added).

That is reflected in the use of the 10-year Treasury bond interest rate as one of the main economic indicators relating to interest rates. And movements in that rate impact financial markets.

When the Fed began cutting its target federal funds rate in September, the yield on the 10-year Treasury stood at 3.70%, a number which had fallen gradually from over 4.6% in May.

Since that time, however, the 10-year Treasury rate has climbed, and currently sits at 4.52%, slightly down from nearly 4.8% in mid-January.

The question many people have is, if the Fed is supposedly committed to cutting interest rates, why are 10-year Treasury rates rising and not falling? Has the Fed lost control of its ability to impact interest rates through monetary policy?

When the Fed last began a major rate tightening cycle, in 2007, the 10-year Treasury rate fell from 4.5% on September 18, 2007 to 3.78% by the end of January 2008. So why haven’t rates on the 10-year Treasury fallen this time around?

What Interest Rates Are Doing

If you look at the yield curve, it is no longer inverted. Short-term interest rates are now lower than longer-term interest rates, which is what you would normally expect to see.

The problem with that is that an inverted yield curve often comes as a precursor to recession. It isn’t a cause of recession, but is rather a leading indicator that recession could be coming in the future.

Looking at the history of inverted yield curves, inverted yield curves have preceded every recession since the 1970s. And with the last yield curve inversion having lasted for over two years, longer than any previous inversion as far back as the data go, there’s certainly a possibility that we could be months away from recession.

What Interest Rate Movements Mean for You

Many people have been enjoying relatively high interest rates on their savings accounts or Treasury holdings, so the last couple of months of rate cuts probably were unwelcome. Maybe some of them are starting to look at moving their money somewhere with higher yield, to potentially protect themselves against the possibility of continued inflation.

The length of time between yield curve inversions and recession historically has been between 6 months and 22 months, averaging about 12 months. So if you fear the possibility of recession, there may still be time to do something about it.

Many Americans have already started to try to help safeguard their assets with precious metals like gold and silver. Gold recently notched yet another all-time high price, and it has a long and established reputation as a safe haven asset.

One of the best aspects of gold ownership is the numerous ways you can own gold. While you can certainly make direct purchases of gold coins or gold bars, you can also own gold coins and gold bars within a gold IRA.

A gold IRA can be funded with a tax-free rollover of existing 401(k), 403(b), TSP, IRA, or similar assets, allowing you to move a portion of your existing retirement savings into gold, retain all the tax advantages of an IRA account, and not have to take a tax hit.

If you’re looking to help safeguard your hard-earned money with gold, whether it’s through a gold IRA or through a direct cash purchase of gold, Goldco can help. With thousands of satisfied customers and over $3 billion in precious metals placements, we have worked hard to make ourselves one of the best gold companies in the business.

Call Goldco today to learn more about how you can put gold to work in helping to safeguard your savings.