3 things to know about interest rates in 2014
Whether they rise or not, things are going to change
By Trey Garrison January 10, 2014 5:07PM
Interest rates will go up. Or they will stay the same. One of those two things will definitely happen in 2014, economists say, and some lenders and investors may have trouble adjusting to the change.
"We think rates are generally headed up. We have a growing economy both here and aboard,” said Mike Fratantoni, chief economist for the Mortgage Bankers Association (MBA). "We’re going to get some differing data like today’s jobs report which was off, but the next jobs report may see employment up. We are anticipating the job market is going to grow in 2014 and the recovery will continue."
Further, he said, a longer-term factor will be that a growing federal deficit will put upward pressure on rates. And third, the Federal Reserve has already made it clear that if U-3 unemployment goes below 6.5%, it will let rates rise.
"We expect that in the third quarter the Fed will stop buying MBS and Treasurys, and start raising interest rates," Frantantoni said.
MBA is projecting interest rates on the 10-year Treasury yield to go from 3% in the first quarter of 2014 to 3.3% by fourth quarter of 2014, averaging 3.2% for the year, and then creeping up to 3.5% by the last two quarters 2015, averaging 3.4% for 2015.
MBA projects that 30-year fixed mortgage rates will go from 4.7% in the first quarter 2014 to 5.1% by the end of the year, and continuing a slow rise to 5.3% by the end of 2015.
Conversely, economists at international macro-economic research firm Capital Economics say they don’t expect interest rates to rise and that the Fed will keep a tight, tight leash on rates through 2014.
"The world economy has entered 2014 with a lot more momentum than it had a year ago. Business and consumer confidence have improved and unemployment is falling rapidly in several countries. However, while this should eventually prompt central bankers to raise interest rates, we do not expect significant hikes this year," the firm states in its Global Central Bank Watch report. "Instead, the Fed and Bank of England are likely to leave rates unchanged even after unemployment falls below their current thresholds, while both the ECB and the Bank of Japan look set to announce additional policy stimulus."
"The acceleration in growth over the past twelve months or so has been particularly strong in advanced economies In principle, this should pave the way for policy- makers to raise official rates from their current exceptionally low levels, particularly given that some central banks – notably the Fed and Bank of England – have explicitly linked future hikes to progress in reducing unemployment," the Capital Economics report states. "In practice, though, the four major central banks in advanced economies are likely to continue to tread very carefully in withdrawing stimulus, let alone actually tightening policy."
One big concern outside the housing and mortgage universe is that if interest rates rise too high, it could essentially bankrupt the U.S. treasury. The Fed is now printing 29 cents for every dollar the U.S. government spends, and servicing the national $17.3 trillion debt is costly even with low interest rates.
A study last fall by the bipartisan Committee for a Responsible Federal Budget said total interest payments on the federal debt in 2013 were approximately $255 billion. That’s based on the Treasury paying 0.01% on three-month bills and 2.98% on 10-year notes, as opposed to the historical average of 3.3% and 5.2 % respectively.
Frantantoni said typically the Fed has made it clear to the Treasury that it will focus on price stability rather than financing the debt, although he acknowledges there is a concern that interest payments on outstanding federal debt could be an issue. Economic growth concurrent with rising interest rates would serve to ameliorate these concerns through increased tax revenues and stronger job growth.
"We’ve had a couple of unusual years, and a lot of folks in the Fed would like to get back to the role of just minding monetary policy,” he said.
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