A Historical Perspective

A Historical Perspective

by Pat Rooney

There is a reason Proverbs says with age comes wisdom.  As interest rates continue to rise rapidly in 2022, such wisdom can come in handy.  For many young people in business have never seen rates this high and the result for them is often a wide eye and hand wringing.

One of my senior bankers, of my generation, and I were talking about the rising interest rates saying we really need to sit the younger guys down and give them a history lesson.  Most of them were in junior high school when rates were at this level for any length of time.  What I want to point out to them is that prior to 2000 the Prime lending rate averaged much higher than the 7.0% we see today.   Charts from the Federal Reserve show that from a 1960 bench mark, the national prime rate started rising in 1966 from 6% to an average of 8% into the 70’s.  Rates peaked in 1979-80 at the remarkable rate of 20%.  And for a newly minted 21-year-old (me) trying to buy a house it was a scary time indeed.  Personally, I wasn’t sure we would ever see low rates again.  Inflation was rampant and government discipline seemed non-existent.  However, the 1980’s brought some relief as Paul Volcker and the Fed brought inflation under control, much to my relief.  Prime, in this decade, averaged around 10%.  The 90’s continued the fight against inflation and the prime rate trended down to an average of 8%.

Only since 2000 has the prime rate trended down to historically low levels of 4% or less and has managed to stay there for much of the two decades since.  Thus, the panic, as many of today’s proformas factored in low borrowing rates when projecting the feasibility of new deals.  Since rates had been low for so long it became accepted.  Many of these deals don’t look so good today.

Yet, as we know, the only constant is change and that’s what happened.  COVID-19 came and the efforts to fight its potentially debilitating effects flooded the country with money.  The result, very predictably, is the inflation we now see.  And with it the rising rates necessary to fight it and hopefully bring rates back down to a lower, more manageable, level.

So, a little back to the future here.  We have been here before and the economy continued to grow then and probably still will now.  What we don’t know is how long the inflation will be with us and how high rates will go.  That’s for another day.