The era of low interest rates is over. This is how investors have reacted to comments by the Federal Reserve Board Chairman Ben Bernanke on June 19 that the downside risks to the outlook for the economy and the labor market have diminished.
Bernanke said that there would be no immediate change in the central bank’s easy money policy, investors figured that this would be soon. In fact, investors had already begun to bid up rates due to anticipating policy change by the Fed, and continued this after Bernanke’s comments.
The higher-interest rate era will benefit savers, be a mixed bag for investors and make loans and credit cards more costly for borrowers.
The consensus shows that the U.S. Treasury yields and rates on credit cards, mortgages, and auto loans and other consumer loans will rise gradually. According to Moody’s Analytics, 10 year Treasury yields will go from 2.44% to 3.5% in 2014 and by the end of 2015, it will reach 4.5%.
A similar forecast is shared by James Paulson who is the chief investment strategist at Wells Capital Management, looking for the 10-year bond yields to reach 4% in 2014.
According to professor of finance at Santa Clara Univesity, Meis Statman, inflation will not go up fast with the current economic weak situation, and in order for interest rates to rise quickly, inflation goes up quickly.
Expectations of higher rates will likely fuel up home sales, but the increased demand will also boost the supply of houses on the market, which in turn balances the demand and supply and helps dampen mortgage rates.
If one is considering refinancing, it is advisable to do it before interest rates increase further.