Do higher interest rates actually lead to higher returns on savings? Research shows a 1% increase in interest rates by the US Federal Reserve equals a 0.34% increase in the rates paid by banks on savings deposits. Why do savers fail to capture the benefits of higher interest rates?
If new disinflationary pressures are left unaccounted for, inflation, holding all else equal, will remain subdued, and the pace of rising rates will be slower than was expected by either the market or the Fed.
Next time you hear a pundit or an investor complain that the Fed is keeping rates too low, consider the evidence that suggests rates are low because nobody really has a grasp on which direction future growth may go.
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