The Lowdown on Interest Rates


Whether you are looking to borrow money or invest it, a sense of the current interest rate environment can be helpful. Interest rates can be thought of as the cost of borrowing money or the return on investments for lending money, and they play a critical role in regulating the economy. 

Beginning in the spring of 2022, interest rates regained a lot of attention. It was about this time that the Federal Reserve began aggressively raising interest rates. Prior to that and dating back to the end of the Great Recession in 2009, interest rates had been held very low. So why did interest rates rise so rapidly and how has the increase affected the economy?

As to the why, that goes back to the role interest rates play in regulating the economy. In the aftermath of the financial crisis, the economy had slowed sharply and fell into a deep recession. Policy makers wanted to stimulate demand in the economy, and so interest rates were lowered and held low to promote borrowing and consumption. Then Covid struck and there was a rapid increase in demand for all types of products because we were stuck at home. That, coupled with supply chain disruptions among other factors, led to a rapidly accelerating economy and inflation. Now, policymakers wanted to suppress demand and slow the economy to get a handle on inflation and, in response, they began to raise interest rates.


How do interest rate changes influence the economy? When interest rates are low, consumers and businesses are more likely to borrow money to make purchases they might not otherwise. This borrowing could be to buy a new car or fund business expansion. Such activity in the aggregate across the entire economy propels expansion. Alternatively, when interest rates are high, those same consumers and businesses will think twice about a purchase because it effectively costs more. These second thoughts lead to delayed and maybe even foregone purchases and cause the economy to slow.

How might the current interest rate environment impact financial decisions? Perhaps the biggest decision many people face is whether to buy a home. Making that choice has been made more challenging given today’s interest rates. Katie Rice and Chelsy Delia at Guild Mortgage here in Truckee shared some insights. “Freddie Mac has been keeping records from April 1971 through today, and they state the historical average of the 30-year fixed mortgage rates is 7.74%. Today, rates are hovering in the low 7% range,” they wrote in an email.

Interest rates will eventually begin to drop and when that happens, those that took out a mortgage with a high rate are likely to refinance. Because that original mortgage is not likely to be held very long, not many buyers are paying discount points. Mortgage discount points are typically paid to lower the loan’s interest rate by 0.25%, so one point would lower a mortgage rate of 7.5% to 7.25% for the life of the loan. For example, on a $500,000 loan a borrower would pay $5,000 to buy one point. Depending on how long you keep the loan, you and your loan officer can determine if it makes sense to buy down your interest rate. It is a very individual decision.

For small businesses, the Truckee/North Tahoe region is home to many resources. The call to start or expand a business is not an easy one and business owners often borrow to make their dreams a reality. In Truckee, we are fortunate to have a small business development center at the Sierra Business Council.

Jessica Carr, director of the Sierra Small Business Development Center, said, “for small business lending, the increased borrowing cost and rate variability of many loan products places a high burden on a business’s cash flow. This translates to less money available to reinvest in the business, and higher prices paid by the consumer. Clients with variable rate loans have seen their payments jump. New SBA 7A loans have had rates increase from 6.5% to 11.25% in just 18 months.”

One bright spot for business owners as we wait for interest rates to drop is that financing for commercial property purchases is relatively affordable, providing an opportunity to acquire business real estate without competing with investors that are waiting for rates to go down.

The Sierra SBDC provides no-cost, confidential, one-on-one business advice to entrepreneurs. Last year, it helped clients leverage $38 million in debt and equity financing to help their businesses start and grow. Its advisors have the skills and network to help businesses find alternative lending options that can refinance existing high-cost debt, invest in startups, access smaller microloans, and avoid predatory pay-day lenders. As rates begin to trend lower, resulting in a stronger borrowing environment, it can provide the assistance local businesses need. 

There’s no denying that borrowing money today is going to cost more. On the flip side, savers have been rewarded with interest rates not seen in many years. Short-term treasury bills, debt issued by the U.S. Government, are paying more than 5%. For longer-term investors, bonds have recently become much more interesting. This is because the price of bonds moves opposite of interest rates. I believe 2022 brought the worst of the interest rates increases. Although nobody knows for sure, I think the next move for interest rates is more likely to be a drop rather than another rise. If this happens, those bonds are likely to appreciate. 

What goes up, must come down. It is not a matter of if interest rates will drop, just a matter of when. When that does happen, the cost of borrowing will go down. That loan taken to buy a house or fund a business can be refinanced for a lower rate. Those bonds in your investment portfolio are likely to be worth more. If you are facing an important financial decision that requires borrowing or investing, although very important, interest rates should be only one of many factors influencing your decision. Don’t let the interest rate tail wag
the decision dog.

~ John C. Manocchio is a CFP® Professional with Pacific Crest Wealth Planning serving the Truckee/North Lake Tahoe region. He and his wife Sarah have called Truckee home since 2005. They are raising two boys and a rescue dog named Lucy. Together they enjoy skiing, mountain biking, camping, and all our region has to offer.


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