#401kFriday: Will interest Rates Balloon or Pop your 401k?

As I’m sure you are aware, the past few years have been characterized by increased interest rates, presenting unique challenges for borrowers, or aspiring borrowers, in America.

In fact, the federal funds rate hit a 22-year high of 5.25-5.5% in November 2023, as a result of the Federal Reserve’s effort to push inflation down to 2%.?

Rates have thankfully stabilized, with the Federal Reserve ending its rate-hike campaign and looking toward rate cuts at the beginning of 2024. However, rates remain higher than they were during much of the pandemic, leaving many still concerned about “high interest rates.”

With that in mind, I wanted to reach out with some helpful historical data that puts current interest rates in context. As you’ll see outlined below, current rates are still relatively low if we look at the past 50 years.?

Post-World War II to 1970s?

After World War II, the U.S. enjoyed relatively low interest rates. For example, the federal funds rate in the 1950s and 1960s hovered around 1-2%. However, by the late 1960s and into the 1970s, rising inflation led to higher rates, with the effective federal funds rate hitting 5-6% by the mid-1970s.

1980s?

The early 1980s witnessed some of the highest interest rates in U.S. history. To combat escalating inflation, the Federal Reserve chairman at the time, Paul Volcker, raised the federal funds rate to unprecedented levels. The peak was reached in 1981, with the prime rate (the rate banks charge their most creditworthy customers) reaching 21.5% in June 1981.

1990s

In the 1990s, under Federal Reserve Chairman Alan Greenspan, the Federal Reserve adopted a policy of gradual rate adjustments. Rates fluctuated within a moderate range during this decade, generally between 3% and 6%. This period was marked by economic expansion and stable, low inflation.

Early 2000s?

In response to the dot-com bust and the 9/11 attacks, the Federal Reserve lowered rates, with the federal funds rate dropping to as low as 1% in 2003. However, the rates were increased in the mid-2000s, reaching about 5-5.25% by 2006. Following the financial crisis of 2008, the Federal Reserve drastically reduced the federal funds rate to near zero (0-0.25%) to stimulate the struggling economy.

Post-2008 Financial Crisis to 2020s

The federal funds rate remained near zero until December 2015, when the Federal Reserve began to gradually increase it again. By 2018, the rate had reached approximately 2.25-2.50%.?

In response to the economic impact of the COVID-19 pandemic in 2020, the Federal Reserve cut the rate back to the 0-0.25% range. This action was taken to stimulate economic activity by making borrowing cheaper, thus encouraging spending and investment.?

As the economy began to recover, concerns about inflation started to arise. The combination of pent-up demand, supply chain disruptions, and expansive fiscal and monetary policies led to rising prices. In 2023, central banks, including the Federal Reserve, started to increase interest rates again in response to rising inflation and a recovering economy, leading interest rates higher.?

We now are seeing stabilization in rates, as the Federal Reserve ended its rate-hike campaign, and even looks toward rate cuts in 2024.?

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I hope this historical insight is useful for you. If you have any queries about the current market, interest rates, or your investments, please feel free to send me a DM. I'm more than happy to help.?

Talk soon.

-Nate