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The case for higher rates

By Marcie Geffner · Bankrate.com
Thursday, September 2, 2010
Posted: 3 pm ET

Interest rates on bank accounts and deposit certificates have dropped to such minuscule amounts that borrowers may indeed wonder whether they should just stuff their money in a good old-fashioned mattress.

Low interest rates are a boon for businesses because they can borrow money on more attractive terms to purchase equipment, hire employees, invest in new product research and so on. Low rates are also good news for borrowers who have an adjustable-rate mortgage, or ARM, or are in the market to refinance a home loan, as Holden Lewis reports in "Rates fall to new all-time lows," on Bankrate.com. Traditionally, low interest rates have been positive for economic growth.

But can a case be made for higher interest rates? After all, the Federal Reserve has held rates at rock-bottom levels for several years, and yet the economy hasn’t recovered -- or at least not much.

Higher interest rates could encourage consumers to pay off debt and increase savings. That would be to the detriment of the credit card spending that drives the economy, but savers would earn more interest on their deposits, and some of that interest would get taken out of those accounts and be spent. Retirees living on fixed incomes are consumers, too, and these folks have suffered a tremendous loss of spending power as interest rates have dropped to the vanishing point.

Higher interest rates could cause more home foreclosures as rates would reset on more ARMs, and that could push some cash-strapped homeowners over the edge. That would be dreadful for those borrowers and the housing sector. Yet an uptick in interest rates also could prompt more home sales as anxious buyers would jump off the proverbial fence and into the market to lock in a price and payment before rates rose further.

By the way, the mattress option is ill-advised, even though the savings on bank fees might make sleeping on your money an attractive proposition. The problem, of course, is that a mattress isn't secure or insured, as Don Taylor reports in "Savings in a mattress? Big mistake" on Bankrate.com.

But about those higher interest rates: If you had a vote at the Federal Reserve, what would you do?

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