Interest rates are something that affects most people. Unless you are a person who has no loans or investments, a change in interest rates will have some impact on your finances.
People who are savers are acutely aware that interest rates have been near zero for a number of years. People with good credit have benefited from low interest rates on mortgages and auto loans. For those with questionable credit interest rates can still be quite high.
Going into this year expectations were that interest rates would be moving higher. This was because in December the Federal Reserve, commonly called the Fed, finally increased interest rates 1/4 percent after keeping them at essentially 0 for 7 years.
Based on history once the Fed starts to raise rates additional increases tend to follow. While expectations were that the increases would occur at a fairly slow pace, the feeling was that rates would likely be increased by about 1% this year.
In a little over a month’s time expectations have clearly changed. At the start of the year the feeling was that the next increase in rates would probably occur in March. The likelihood of this happening is quite unlikely now. There is even some question, as to whether the Fed will even increase rates at all this year.
There are two main reasons to account for this change in sentiment about the likelihood of interest rates rising. One is related to financial markets, and the other concerns how the overall economy is doing.
Clearly financial markets have been under pressure this year. Stock markets have been performing poorly not only in the U.S., but in most countries. Normally in a period of financial turbulence the Fed has been more hesitant to raise rates.
Looking at the economy the picture is more mixed. The Fed in December finally raised rates in part because of an improvement in the labor market. For the month of January the increase in new jobs was still positive, but a little below expectations, and not quite at the pace we saw late last year. Other economic data, such as purchasing managers surveys also were slightly disappointing.
If the financial markets had been performing normally, I don’t think that the economy performing slightly below expectations in January would be enough for the Fed to change course. However, given the increased uncertainty it would appear likely that the Fed would want to see several months worth of data before making its next move.
While this discussion has been on Fed policy, which impacts short term interest rates, there has also been some movement in longer-term rates this year. Longer-term interest rates were also expected to rise somewhat this year, and instead have fallen. The 10-year Treasury, which impacts mortgage rates started the year at 2.27%, and is now below 2%, as of Feb. 5.
This would mean continued low mortgage rates for those looking for a home mortgage or to refinance one. Most likely the 10-year Treasury will not stay below 2% for an extended period of time, but rates near current levels will be a positive for the auto and housing industries.
For savers with bank or money market accounts, if the Fed delays the raising interest rates, this will be disappointing news. However, any delay in raising rates will likely be months not years.
The economy during this recovery has had phases where economic growth would accelerate, only to slow down again. We are likely in a period of a little slower growth currently, but most likely the economy will improve again at some point later in the year.
Likewise the stock market has been more volatile currently, but will likely see calmer times in a few months. The Fed will probably not raise rates again until the economy shows increased signs of vigor and financial markets are more stable. No one can say exactly when that might be, but there is a good chance it will be sometime in 2016.
