Interest Rate Forecast

Economic Forecasts

Long Rates Still Dropping Because of the Coronavirus

Kiplinger’s latest forecast on interest rates

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The Federal Reserve lowered its interest rate by half of a percentage point on March 3 in response to the threat of a coronavirus-induced slowdown. It is likely to cut by a full percentage point at its March 18 meeting, bringing the federal funds rate to zero. This means that any further Fed action will have to be through alternative measures instead of through short-term interest rates.

The Fed has a long history of stepping in when markets are panicking and business or consumer sentiment is dropping. The Fed is making larger-than-normal cuts in order to send a message of reassurance. While it is unlikely that an interest rate cut will address the real causes of the slowdown, it will have symbolic value and may boost consumer borrowing for motor vehicles.

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Long rates are near record lows, and the 10-year Treasury yield is likely to stay at or below 1.0% for awhile because of fears that the coronavirus panic may weigh on the economy. The U.S. economy is likely headed toward recession, because attempts to contain it are causing a slowing of both consumer and business spending and activity. When the stock market heads down because a recession look more likely, investors rush to Treasuries as a safe haven.

The bank prime lending rate fell to 4.25% after the Fed acted on March 3, and should drop to 3.25% when the Fed cuts again. Average 30-year mortgage rates are likely headed down below 3% because of the drop in the 10-year Treasury rate. Low mortgage rates should contribute to a good housing market this spring by making mortgages easier to afford. Low rates won’t boost business borrowing much, though.

Source: Federal Reserve Open Market Committee