Experts on Climbing Interest Rates
What Experts Have to Say about Climbing Interest Rates
It may seem that interest rates are destined for skyrocketing heights – the same way that a spoonful of sugar can make the medicine go down, experts say – but it’s not all bad news. The Federal Reserve is raising rates to tame inflation that has hit historic highs.
The Fed’s latest hike, a quarter-point increase on December 7, was the seventh of the year and came after two previous increases in November and October. The Fed also said it would consider more hikes in the future.
Mortgages and Bonds
Mortgages are directly influenced by the 10-year Treasury yield, which lenders use as a benchmark for mortgage rates. Investors’ inflation expectations also influence the Treasury’s results.
That means the Fed has to raise higher rates than expected to curb inflation, which is unsuitable for the economy because it makes it more expensive for consumers and businesses to borrow money. That can dampen job growth and wage increases, but experts don’t believe it will tip the nation into a recession.
Meanwhile, the bond market has reacted positively to recent reports of inflation slowing down. That helped push the 10-year Treasury yield down to 2.43%, the lowest since early October.
But even with the Treasury’s rate lower, some experts are still concerned that inflation will continue to climb. The Fed has been a big advocate of low rates to help the economy grow, but that could change if inflation continues to rise at an unsustainable pace.
CDs, Savings, and Money Market Accounts
Bankrate forecasts that the average rate on a one-year certificate of deposit will rise to 1.25 percent in 2022, while the top-yielding five-year certificate will climb to 1.75 percent. Similarly, Bankrate expects the average savings and money market account rate to reach 1.05 percent.
According to Bankrate’s forecast, the average rate on a 30-year fixed-rate mortgage should peak in 2022 at 3.75 percent. The average rate on a 15-year loan will jump to 5.25 percent, and the average interest on a home equity line of credit will peak at 6.25 percent.
The Fed’s rate hikes have made credit card rates sensitive to the prime rate, a crucial reference point for most credit cards. McBride forecasts that the prime rate will rise to 3.75 percent by the end of 2022, though actual credit card APRs depend on the assessed creditworthiness of cardholders and the margin that firms charge on top of the prime rate to make a profit.
Insurance Companies Are Using Rising Interest Rates to Boost Annuity Portfolios
The rise in interest rates has made it easier for insurers to offer annuities, which are monthly income streams buyers can take out for life. They can also use the higher rates to invest in other asset classes, such as stocks and bonds, and pay out more extensive checks at the end of their terms, says Jeremy Alexander, CEO of Beacon Annuity Solutions.