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March 14, 2014

Inflation/Interest Rate Cycle

The inflation/interest rate cycle at a glance

  • When prices rise, bondholders worry that the interest they're paid won't buy as much.
  • To control inflation, the Fed may raise interest rates to get investors to purchase bonds.
  • When interest rates go up, borrowing costs rise. Economic growth and spending tend to slow.
  • With less demand for goods and services, inflation levels off or falls. Bond investors worry less about the buying power of future interest payments. They may accept lower interest rates on bonds, and prices of older bonds with higher interest rates tend to rise.
  • Interest rates in general fall, fueling economic growth and potentially new inflation.

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