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Economic Forecasts

Interest Rates Headed Higher

Kiplinger's latest forecast on interest rates


GDP 2.9% pace in '18, up from 2.3% in '17 More »
Jobs A tight labor market will make hiring more difficult More »
Interest rates 10-year T-notes at 3.3% by end '18 More »
Inflation 2.6% 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 July More »
Housing Price growth: 5.0% by end of '18 More »
Retail sales Growing 4.9% in '18 (excluding gas and autos) More »
Trade deficit Widening 5%-6% in '18 More »

The global stock market hiccup stemming from worries over Italy is causing a flight to the safety of bonds, dropping rates. But despite short-term volatility, long-term rates will move up over time. Worries that cause stock market fluctuations are unlikely to overcome the reasons for the previous upward trend in rates: rising government deficits and an expanding economy with slightly higher inflation.

The Federal Reserve is committed to raising short-term rates this year and next because it’s concerned about the tightening labor market. The Fed very much wants to stay ahead of any inflation that rising wages may generate and will lift short-term rates by a quarter of a percentage point twice more in 2018 (after March’s hike). That would put the federal funds rate at 2.25% heading into 2019, when another three to four increases are expected.

We think today’s 2.8% yield on the 10-year Treasury note will hit 3.3% by year-end. The bank prime rate that auto loans and home equity loans are based on will bump up from 4.75% to 5.25%. The 30-year fixed-rate mortgage is likely to go up to 4.7%, and the 15-year fixed-rate mortgage should rise to 4.3%.

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Higher interest rates are finally coming to savers. Although big banks have been slow to raise deposit rates, rates on money market accounts and CDs at smaller banks, credit unions and online banks have picked up to nearly match rates on Treasury bills and notes.

Source: Federal Reserve, Open Market Committee

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