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Interest Rates Are High

The title of this article says it all. This country is faced with high interest rates at the moment. And yet, borrowers today will receive little, if any, sympathy from anyone, say, age 60 or older.

They have seen worse. Much worse.

But it’s fair and reasonable to say interest rates today are high. We have actual data to prove it.

First and foremost, there are any number of interest rates to use as a barometer of our economy. You could use Treasury rates, 30-year mortgage rates, federal fund rate, CD rates, or overnight lending rates. For our purposes, I am going to use the prime rate – primarily because we have a consistent and robust data set for it. That makes the prime rate a helpful proxy.

The Federal Reserve bank of St. Louis has monthly data for the prime rate going back to January 1949.

The lowest we’ve seen the prime rate is 2%, which occurred in the late 1940s and early 1950s. The highest we’ve seen the prime rate is 20.5%, which occurred in the early 1980s.

That’s a massive spread.

Think of it this way. A $250,000 30-year, fixed-rate mortgage would have monthly payments of $924 if interest rates were at 2%. If interest rates spiked to 20.5%, that same mortgage would devour $4,280 each and every month. You would pay a staggering $1.2 million more in interest over the 30 years if you were never able to refinance the 20.5% loan.

Banks often use the prime rate to set interest rates for individuals and businesses. So the higher the prime rate goes, the higher borrowing rates will be and vice versa.

Currently, the prime rate is 8.5%, a far cry from 20.5%, which was recorded in 1981.

But here’s where a little data mining provides useful perspective.

Again, we have monthly data for the prime rate going back to 1949. That means we have 905 monthly observations of this particular interest rate. We can slice and dice the data in many ways. One simple thing to do is sort the data from highest to lowest and see where today’s rate lands in the order.

If you do, you will see that there were 179 monthly data points higher than today’s rate of 8.5%. And that means there are 725 data points either at or below today’s rate.

In other words, our current prime rate is in the top 20% of observations.

Interest rates are high.

That’s not to say those with, let’s call it wisdom – and perhaps a few more gray hairs – are wrong. It’s just that rates in the 1970s and early 1980s were off-the-charts high. That was an anomaly.

It’s kind of like rainfall. You can’t say 15 inches of rain isn’t a lot in Kansas between July and September only because we received close to 25 inches of rain in that time in 1993. The 1993 period was simply an extreme situation.

And so it is with interest rates in the late 1970s and early 1980s. It makes all comparisons difficult because it was such a rare event in history.

In other words, both arguments are right. It’s fair to say current interest rates are high, and it’s also fair to say they have been far worse. One doesn’t preclude the other.

Let’s hope rates don’t have to go much higher from here. Reliving the late 1970s and early 1980s wouldn’t be much fun. Just ask anyone 60 or older.

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