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Will Interest Rates Ever Go Up?

Sigma Investment Counselors

January 25, 2013

Yes, but perhaps not as soon as many expect. It is well-established that many of the world’s governments, including our own, are printing money and, historically, this has proven to be inflationary which usually leads to higher interest rates.

However, up to now, money printing has not led to significant, broadly-based inflation. The Fed has indicated that interest rates are likely to remain low until unemployment decreases to about 6.5%, compared to the current rate of nearly 8.0%. Moreover, high unemployment has reduced labor’s ability to press employers for higher wages, an historical precursor of increasing inflation.

Without labor or commodity price based cost-push inflation, one might look to increased demand to stimulate price increases, but that isn’t happening either. Overall, the supply/demand equation appears to be substantially in balance and the corporate world does not seem to be anticipating enough increase in demand to justify capital expenditures to increase capacity.

Despite the foregoing, one could reasonably ask “why are investors willing to accept interest rates approaching zero on shorter maturities of US debt”? I would like to postulate that it may be more a function of a lack of alternative investments that provide virtual certainty with respect to safety of principal. Small investors can safely put money into banks or CDs, knowing that their capital is insured up to the specified level. That’s fine if you have a few hundred thousand or less, but what about the individual, company or country that needs to find a safe haven for millions or billions?

All comments or suggestions are welcome.

Walter J. Kirchberger, CFA

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