Interest rates will continue rising in 2019. But savings rates, mortgages, certificates of deposit, and credit cards are growing at different speeds. Each product is based on a different point of reference. As a result, the increases for each depend on how interest rates are determined.
All short-term interest rates follow the federal funds rate. This is what banks perceive to obtain cash loans from federal funds. At its December 19, 2018 meeting, the Federal Open Market Committee raised the federal funds rate by a quarter of a point. It is encouraged by sustained economic growth, positive working relationships, and a strong inflation rate.
The current federal funding rate is 2.5%. The Federal Reserve intends to maintain it until 2021. The Committee started upping rates in December 2015, once the recession ended without a hitch.
Long-term rates track the 10-year Treasury yield. On June 19, 2019, it was 2.03%. Usually, as the economy improves, the demand for cash decreases. It returns to growth when suppliers try to make the stock more attractive. Significant Treasury increases raise interest rates on long-term loans, mortgages, and bonds. The following table presents interest rates and preliminary forecasts for the future. You can take five steps to protect yourself from the highest interest rates.
Interest rates on savings and certificates of deposit respect the interbank interest rate. This is the interest rate that banks impose on short-term loans. Banks pay you a little less than labor so they can make a profit. Savings accounts follow the usual rate for one month, while CDs follow long-term rates.
The Libor is generally a few tenths higher than the federal funds rate. As a result, the return you get from your savings accounts and CD accounts must remain the same by 2021.
Banks base their credit card rates at preferential rates. This pays the best clients for short term loans. They exceed the federal funds rate by 3 points. Banks can charge fees ranging from 8% to 17% above credit card fees, depending on credit score and card type.
Expect these rates to remain stable over the next two years. It's a good idea to pay your outstanding balances now, and they should increase rates.
The federal funds rate determines adjustable borrowing rates. These include mortgage lines of credit and any variable rate loan. With the increase in the federal funds rate, the cost of these loans will also increase. To avoid surprises, pay as much as you can in the next two years. When it makes sense, ask your bank to switch to a fixed rate loan.
Fixed interest rates for 3- to 5-year loans do not match the prime rate, the Libor rate, or the federal funds rate. Instead, they are about 2.5% higher than the Treasury yields in one, three, and five years. Gains represent the total return investors receive for maintaining their bills.
The US Treasury sells Treasury bills, bonds, and notes as part of a fixed interest rate auction closely monitoring the federal funds rate. As a result, investors can sell them on the secondary market. Many other factors influence your performance, including the dollar demand of forex traders. With the rising demand for dollars, the demand for treasury bills is also increasing. Investors will pay more to buy them because the interest rate does not change.
The demand for treasury is increasing even in times of global economic crisis. Indeed, the US government guarantees repayment. All of these factors make long-term interest rates less predictable than those based on federal funds.
On the other hand, investors receiving more income for short-term accounts, they want a higher return on long-term securities. But if they lose faith in the economy, they will purchase long-term bonds, regardless of the short-term trend of their accounts. This will offset the interest rate curve. If they are scared of a recession, they will prefer long-term securities to keep their investments safe. If this happens, the interest rate curve is reversed.
When rates rise, it is better to keep the loans at a fixed rate. The increase in interest rates will not affect them. But if you need a new loan, sign up now before rates go up.
Banks have fixed rates for conventional mortgages slightly above 10, 15 and 30-year Treasury bills. Interest rates on long-term loans increase in line with these returns. The same thing applies to student loans. Mortgage rates closely track Treasury yields.
This is not the time to refinance a fixed rate mortgage for a variable rate. For new buyers, you do not take a floating rate mortgage to pay for a larger home. It is better to get a fixed rate loan, even if it means that you can only pay for the smaller house.
Government, municipal, and corporate securities compete with the US Treasury to attract investors. Since they are riskier than US government bonds, they should pay higher interest rates than treasury bills. This is true for all other types of titles.
Elliot Kravitz, ATP