Visualizing 40 Years of U.S. Interest Rates
Visualizing 40 Years of U.S. Interest Rates
In 2022, the Federal Reserve hiked interest rates by 400 basis points in one of the fastest rate increases in decades. In May, it raised rates to a range of 5.0-5.25%, a 16-year high.
Yet in spite of these increases, rates still fall below historical averages.
In Part 1 of our Understanding Market Trends series from Citizens, we show interest rate trends over modern history, and the implications of increasingly hawkish monetary policy in today’s environment.
U.S. Interest Rates: Reversing the Trend
For decades, U.S. interest rates have fallen due to structural factors including slower GDP and employment growth.
But with COVID-19, trillions in fiscal stimulus, and Russia’s invasion of Ukraine, demand dynamics have dramatically shifted. U.S. inflation hit 40-year highs, met with a strong labor market. As a result, the Federal Reserve has made aggressive moves to raise rates to prevent the economy from overheating.
Below, we show average annual 10-year Treasury yields, a proxy for U.S. interest rates, and their annual percentage change since 1980. Data is as of May 2, 2023.
Year | Average U.S. Interest Rate | Annual Percentage Change |
---|---|---|
2023* | 3.6% | -11.3% |
2022 | 3.0% | 155.3% |
2021 | 1.5% | 63% |
2020 | 0.9% | -52% |
2019 | 2.1% | -29% |
2018 | 2.9% | 12% |
2017 | 2.3% | -2% |
2016 | 1.8% | 8% |
2015 | 2.1% | 5% |
2014 | 2.5% | -29% |
2013 | 2.4% | 71% |
2012 | 1.8% | -6% |
2011 | 2.8% | -43% |
2010 | 3.2% | -14% |
2009 | 3.3% | 71% |
2008 | 3.7% | -44% |
2007 | 4.6% | -14% |
2006 | 4.8% | 7% |
2005 | 4.3% | 4% |
2004 | 4.3% | -1% |
2003 | 4.0% | 11% |
2002 | 4.6% | -24% |
2001 | 5.0% | -1% |
2000 | 6.0% | -21% |
1999 | 5.7% | 39% |
1998 | 5.3% | -19% |
1997 | 6.4% | -11% |
1996 | 6.4% | 15% |
1995 | 6.6% | -29% |
1994 | 7.1% | 34% |
1993 | 5.9% | -13% |
1992 | 7.0% | 0% |
1991 | 7.9% | -17% |
1990 | 8.6% | 2% |
1989 | 8.5% | -13% |
1988 | 8.9% | 4% |
1987 | 8.4% | 22% |
1986 | 7.7% | -20% |
1985 | 10.6% | -22% |
1984 | 12.5% | -2% |
1983 | 11.1% | 14% |
1982 | 13.0% | -26% |
1981 | 13.9% | 12% |
1980 | 11.4% | 20% |
Over the last four decades, the highest average annual interest rate was 13.9% in 1981, while the lowest was 0.9% in 2020.
Benefits and Drawbacks
As interest rates rise from historic lows, what are the advantages and disadvantages of the current environment?
Pros | Cons |
---|---|
Strong labor market with 3.4% unemployment rate | Slower than expected GDP growth |
Real interest rates historically low | 5.0% inflation |
Businesses with pricing power better equipped to maintain borrowing capacity | Inverted Treasury yield curve |
On one hand, real interest rates remain near historic lows. After falling negative in 2021, 10-year real interest rates hover around 1.4%. Meanwhile, unemployment rates are below historical averages. As of March, there were about two job openings for every unemployed person.
In today’s environment, businesses with pricing power will likely be more resilient to maintain borrowing capacity and healthier margins.
On the other hand, as interest rates rise, it becomes more expensive for firms to access corporate debt as lending conditions become more constricted.
Spillover Effects of Rising U.S. Interest Rates
As U.S. interest rates have increased, market participants have become increasingly pessimistic of the near-term economic outlook.
Consequently, the yield on short-term U.S. bonds has risen since near-term risks appear greater than risks in the long term. The 10-year minus 2-year Treasury yield curve, which subtracts short-term bond yields from longer-term yields, illustrates this trend.
In March, the Treasury yield inverted to -1.07 basis points, one of the lowest points in decades.
When this yield curve inverts, meaning short-term yields are higher than long-term yields, it often signals market uncertainty. Historically, this has signaled a recession, but often with a several-month lag.
What Are the Implications for Businesses?
Years of ultra-low interest rates have supported profit growth and more accommodative lending conditions. As interest rates rise, debt costs will increase, putting a strain on firms’ bottom lines, especially for companies with floating-rate debt.
Additionally, as companies look to refinance debt, borrowing costs will become higher.
The good news is that companies borrowing at fixed rates will be better positioned. Middle market private equity firms—those that acquire companies valued between $50 and $500 million—have seen revenues increase 11% compared to the first quarter of last year, while profit margins have expanded. The impact of the March 2023 banking crisis was not covered in the data.
In turn, companies with strong pricing power, improving cost management, and the ability to pass on rising costs to customers will be better able to navigate today’s uncertain environment. Given the number of variables at play, firms that adapt quickly could have greater resilience.
In Part 2 of the Understanding Market Trends series, we look at how disinflation may affect company financing.
-
Markets10 hours ago
The Most Popular TV Brands in the U.S.
Korean brands dominate the U.S. TV market.
-
Markets18 hours ago
The Fastest Rising U.S. Housing Markets in 2024
As U.S. home prices hit record highs, which housing market is seen the fastest growth? This graphic shows the top 10 across the country.
-
Markets3 days ago
Swiss Watches: Market Share by Brand in 2023
In this graphic we rank the top Swiss watch brands, based on their estimated 2023 market share.
-
Markets4 days ago
Charted: Luxury Goods Investments vs. S&P 500 in the Last 10 Years
How does investing in luxury goods like expensive watches and rare whisky compare to other goods, or to the S&P 500?
-
Markets7 days ago
Visualizing the World’s Largest Sovereign Wealth Fund
This graphic breaks down the portfolio of the world’s largest sovereign wealth fund, valued at $1.4 trillion.
-
Markets1 week ago
The 12 Worst Investment Funds Over the Past Decade
The 12 worst investment funds have destroyed $56 billion in shareholder wealth over the past decade, as of Dec. 2023.