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Low Interest Rate Long Term Effect

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Low Interest Rate Long Term Effect

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  • December 2, 2012
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Low Interest Rates Long Term Effect
"The prolonged low-interest rate environment is transforming the banking industry from savings and loans to service and loans," said Dan Geller, executive vice president of research firm Market Rates Insight in San Anselmo, Calif. (Fitzpatrick) Consumers may think that the continued low interest rates are a profound thing, but banks on the other hand think much differently. Consumers are refinancing their houses at rates as low as 2.875%, while big banks like Hudson City Bancorp Inc., a mortgage lender, are being forced to sell themselves to M&T Bank Corp. These super low interest rates are complicating the industry’s journey to a recovery from the financial crisis. In the article” Low Rates Pummel Banks”, from the Wall Street Journal, Dan Fitzpatrick further explains the negative effect of long term low interest rates. Fitzpatrick describes it as “Borrowers Benefit, but Industry Lending Profits Hit Lowest Level in Three Years”. (Fitzpatrick) Usually, we would believe it to be true that lower interest rates are a good thing, because they make it cheaper to borrow. Like so, there are those in support of the lower rates for example, the Fed and the consumers. For the past four years, since the 2008 financial crisis, the Federal Reserve Board had been trying to bounce back the US economy. The short term interest rates are extremely low and by purchasing more bonds they are reducing long-term rates. In all this has lowered the Ten-year U.S Treasury yields to 1.43%, the lowest since World War II. (Fitzpatrick) The Feds see this as a positive because they believe the low rates increase the economic growth along with employment. They support their belief by stating that the low rates make it easier and cheaper for companies and individuals to borrow money. These low rates developed, in part due to the Fed, have sprung a rush in the mortgage refinancing industry.

The growth in mortgage refinancing has assisted fee revenue at...