Thought Experiment: Interest Rates Going Up
May 31, 2024
by a searcher from Duke University in Chapel Hill, NC, USA
While like many here I am hopeful that interest rates will go down soon the reality may be "higher for longer". And higher might mean much higher. For this experiment imagine that you found your idea search target (retiring owner, clean financials, an industry you know inside and out, a 5 minute commute,... +whatever makes it ideal for you) but just as you are about to send an LOI the FED doubles the prime rate. So, you would be looking at ~20% on a 7a loan. What do you do? Try to save the deal or walk away? If you try to save it what would be your plan?
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA
As for movements in the Prime Rate, the largest movements up happened from 2/1988 to 2/1989 with a total increase of 3.00% over 1 year; 3/1994 to 2/1995 with an increase of 2.75% over 11 months; 6/2003 to 6/2006 with a 4.75% increase over three years; 12/2017 to 12/2019 with a 2.00% increase over 1 year; and 3/2021 to 7/2023 with an increase of 5.25% over 3 years & 4 months. So even if Prime moved up the most it has in any given period in the last 40 years at 5.25% from where it is at now, it would only be at 13.75%. However, we have already been moving up by 5.25%, the highest increase during any period since 1983, so I would not anticipate it would keep moving up that much more.
The largest movements down were from 11/1984 to 8/1986 with 3.75% down over 21 months; 1/1999 to 6/2003 down 5% over 4.5 years; and 6/2006 to 12/2008 down 5% over 2.5 years.
As it relates to where interest rates are likely to go from here, I am certainly not the one to trust. I have been wrong more often that right trying to guess where interest rates are going to go. But with that said, I will opine on the topic anyways. Inflation has creeped up again and is higher than the Fed's target of 2.00% currently north of 3.00%, Until it gets down closer to 2.00% I think it is unlikely the Fed is going to cut rates. Is it possible interest rates could go higher? In January I would have said the chance of that was about 1%. Today I think the chance of that is more likely 25%. If inflation picks up even more, I do not think the Fed will have an option but to raise interest rates. The problem right now is not that raising interest rates is not working, but is that our government keeps printing and spending money, which is countering the impact the rate increases have had to slowing the economy.
Ultimately if trends hold true, I think inflation will eventually go down at which point the Fed will move interest rates down quickly and the Prime rate will respond accordingly. I hope this helps with the discussion.
in Boston Metropolitan Area, USA