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Economic Forecasts

Long Rates Step Up on Inflation Fears

Kiplinger's latest forecast on interest rates

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GDP 2.9% pace in ’18, up from 2.2% in ’17 More »
Jobs Unemployment rate will decline further More »
Interest rates 10-year T-notes at 3.2% by end ’18 More »
Inflation 2.5% in ’18, up from 2.1% in ’17 More »
Business spending Up 7% in ’18, boosted by expanded tax breaks More »
Energy Crude trading from $65 to $70 per barrel in December More »
Housing Price growth: 5.0% by end of ’18 More »
Retail sales Growing 5.1% in ’18 (excluding gas and autos) More »
Trade deficit Widening 5%-6% in ’18 More »

Long-term interest rates are rising in response to the declining unemployment rate, as market participants worry about future inflation pressures. The concern is that the Federal Reserve will have to raise rates at a faster pace to counter inflation pressure from faster wage hikes. However, the Fed is not likely to deviate from its once-a-quarter rate hike program until the second half of 2019. That should be plenty of time to see whether inflation pressures develop. There may be some continued upward pressure on the 10-year Treasury rate, though, because the unemployment rate may dip a bit further next year and market worries are likely to continue.

The upward move in long rates should keep the yield curve from inverting. The yield curve becomes inverted when short-term rates are higher than long-term ones, which historically indicates an economic slowdown is on the horizon within 12 months. Any inversion is not likely to lead to a recession this time, but fears that it could had been spooking the market.

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Fundamentals indicate long-term rates are likely to move up over time. Rates could dip in the near term because of worries over the trade war between the United States and most of the rest of the world, causing investors to seek bonds’ safety. But rising government deficits amid an expanding economy with slightly higher inflation should keep rates on a gradual upward track.

We think today’s 3.2% yield on the 10-year Treasury note will edge up to 3.3% by year-end. The bank prime rate that auto loans and home equity loans are based on will bump up from 5% to 5.5%. The 30-year fixed mortgage rate is likely to go up to 4.8%, and the 15-year fixed mortgage rate should rise to 4.3%.

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Higher interest rates will come to more savers. Big banks have been slower than small banks, online banks, and credit unions to reward savers, but their rates on money market accounts and CDs are likely to participate in a general upward move.

Source: Federal Reserve Open Market Committee

See Also: America’s Yield Curve Panic Is Overdone