Obama and Interest Rates

President Obama reached his 100th day in office this week with huge questions lingering regarding the effectiveness of his policies and strategies. While it may take years or decades to objectively evaluate the Obama Administration’s response to the financial Pearl Harbor he has faced, at least for this milestone week Obama enthusiasts point to the positive. Senator Arlen Spector jumped off the Republican ship to the Democrat side, leaving Democrats one Senator short of the 60 needed to be filibuster-proof. And while many of backward-looking economic releases are shockingly bad, Obama’s economic team is quick to highlight that some of the forward-looking economic indicators are improving.

One thing that no one deny about Obama and the government’s economic plans is that they are ambitious. Driving short-term interest rates to zero is not enough, the Fed and Obama are in consensus that buying mortgage debt securities and Treasury securities in large quantities is needed to help keep long term interest rates low. All of this spending by the Fed and Treasury Department comes on top of various bailouts, not to mention the Obama administration’s other spending for initiatives in health care, education, and green technology. The question, of course, for many economists is will all this government spending lead to runaway inflation?

A burst of inflation in the U.S. economy would increase interest rates. Borrowers don’t want to be caught in variable loan or mortgage if this happens. Savers, on the other hand, can be provided with some opportunities to increase their investment returns. For instance, a saver with a one year CD earning 2.00% could take a 90-day penalty and reinvest at a much higher rate to end up earning more money on their CD. With a spike in inflation, savers with money market accounts and savings accounts could use a site like MoneyRates.com to keep on top of the latest rate increases and improve their monthly interest earned. So remember with all the talk of government spending, interest rates may not stay low forever.