May 10, 2024 - Economy

Yes, interest rates really are high right now

Illustration of a hand pointing to a percent sign on a chalkboard

Illustration: Sarah Grillo/Axios

Invariably, when we write about the cost of borrowing money with terms like "super-high interest rates" or refer to the Fed's "historic rate-hiking campaign," we hear complaints from readers — some polite, some not — who remember when rates were even higher.

The big picture: But we stand by this language, which is accurate both relative to the long arc of financial history and in the context of contemporary debt levels and asset prices.

  • It's absolutely true that rates were higher throughout the 1980s and for large parts of the 1970s and 1990s.
  • But in fact, that era was the aberration. And just because rates haven't reached the peaks seen then doesn't mean they aren't still high by historical standards.

What they're saying: "After living through the 1980's and being ecstatic to get a 7.5% adjustable mortgage, I realize that I'm supposed to run around screaming, but alas, no," a reader wrote to us in a wry email typical of the genre, responding to an item this week.

Flashback: Over the decade of the 1980s, the average rate on a 30-year fixed-rate mortgage was 12.7%, according to data from Freddie Mac, compared to 7.09% last week and a recent high of 7.79% last fall.

  • But that 7.79% level was higher than it was in every single week since November 2000. That amounts to a 23-year span in which there have been five presidents, all with lower rates than the recent highs.
  • The Freddie Mac mortgage data only goes back to 1971, but it's clear that interest rates were significantly lower than they are now in the era before the Great Inflation began in the late 1960s.

The return on Treasury bills — a measure of the bedrock risk-free interest rate — was 5.07% in 2023. It was lower than that in every single year from at least 1928 (when the data begins) through 1967.

  • Frequently, it was a lot lower than that. In the decade of the 1950s, for example, the risk-free rate averaged 2%, and in its highest year, 1959, was 3.4%.

Between the lines: In stable industrial societies, it's normal for rates to be significantly lower than they are now in the U.S. And it is extremely unusual to see the high levels reached in the 1980s.

Fun fact: The Bank of England has a data set of British interest rates going back more than three centuries. From 1695 to 1970, the bank's policy rate averaged 4.3% — and frequently remained lower for long stretches punctuated by spikes needed to maintain the gold standard.

  • That's roughly a full point lower than the current interest rate settings of both the Bank of England and the Fed.

Zoom out: There have been big shifts in the economy since the 1980s, driven by lower rates — and given current debt levels and asset prices, the rise in rates over the last two years is highly consequential.

  • High debt levels and elevated asset prices are all premised on the massive downward trend in interest rates that occurred from roughly 2000 through 2021. A further move upward in rates could have far-reaching, unpredictable consequences in light of that fact.

By the numbers: Government bond yields peaked in 1981. That year, the national debt was 25.1% of GDP, per the Congressional Budget Office. Last year, that number was 97.3%, and it's rising fast.

  • Debt owed by non-financial corporations was about 49% of GDP at the end of last year. That was about 31% back in 1981.

More broadly, the downshift of interest rates since the 1980s has fueled higher prices for assets of all types — and while markets have weathered the rise in interest rates surprisingly well so far, it's hard to imagine what would happen if we returned to early 1980s rates.

  • From 1981 to 2023, housing prices have risen by about 5x, per the Federal Housing Finance Agency's home price index, compared to a 2.9x rise in average hourly pay for non-managerial workers and a 1.8x rise in consumer prices.
  • That disproportionate rise in home prices has many causes, including supply constraints, but lower interest rates are a big part of the story.
  • Home prices have wobbled but not really decreased since mortgage rates surged in 2022, meaning affordability looks worse than it did back in an earlier era of higher rates.

The bottom line: Yes, rates are not as high now as in the 1980s. But given the current calibration of debt levels and asset prices, they still qualify as quite high.

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