Why Are Interest Rates Rising Lately?

And Might Rates Go Down Again Soon?

Why Are Interest Rates Rising Lately?
February 5, 2020

After a period of interest rates near historic lows, borrowing costs began to rise in late 2013 and have continued rising into early 2014. Homebuyers may have missed their best opportunities, but current rates are still well under 5% - not a bad deal in historical context. Even so, should you wait to buy a home? Is there any reason to expect rates to sink again, and why have they been rising in the first place? The primary reason can be summed up in two words – The Fed.

Amid the housing crisis five years ago, the Federal Reserve embarked on a policy known as quantitative easing (QE). This policy involved purchasing large quantities of Treasury bonds and other securities to keep interest rates low until the economy rebounded and unemployment decreased to a target rate of 6.5%. The QE policy is into its fifth year now, and unemployment as of January 2014 is still above 6.5% in an arguably recovering economy. This proves the axiom that there is nothing more permanent than a temporary solution.

With the Fed policy still in place, why are interest rates rising? The Fed had been signaling a dial-down of their QE policy, reducing their monthly purchases of bonds and mortgage-backed securities. They did so recently, dropping from $85 million to $75 million monthly purchases. Combine reduced Fed influence with signs of economic growth, and interest rates are likely to continue to climb back to levels they would have reached naturally. Analysts are predicting 5-6% interest rates throughout 2014.

Could interest rates fall again? It's possible, even with most signs currently pointing toward slowly rising rates. Here are several scenarios:

  • Transition Uncertainty – With Ben Bernanke giving way to Janet Yellen as Fed Chairman, people are guessing the Fed's next move. So far, Chairman Yellen has given no indication of altering the current policy. Any surprises in her early tenure could throw the market into uncertainty, and the Fed could decide to slow, or even reverse, the tapering process. However, most experts consider this unlikely.

  • Unemployment Numbers – December 2014 jobs numbers were disappointing, and continued high unemployment may convince the Fed to resume larger bond purchases. With many of the long-term unemployed dropping out of the workforce entirely, the job numbers may be misleading compared to the expected effect on the economy. Expect some overreaction.

  • Stagnant or Declining Economy – Most analysts do not expect this, but there are always wild cards to consider. For example, the widely debated effects of ObamaCare should become evident toward the end of 2014. Any signs of a future death spiral for ObamaCare and/or imminent bailout of insurance companies may well send the economy south and spur more intense QE efforts by the Fed.

  • Election Year Overreactions – Nothing will create panic like a declining economy or stagnant jobs reports in an election year. While 2014 is not a Presidential election year, the stakes are high with control of the Senate arguably in play. Unanticipated stimulus policies may suddenly appear in the late summer or fall. These policies could nudge interest rates downward.

Other major events may spur economic chaos, such as overseas conflicts, oil supply disruptions, and terrorist attacks. Even so, interest rates are likely to continue a slow rise through 2014 – but there are certainly economic and political factors that can slow the economy down and/or spur the Fed to continue their current bond-buying policy to drop interest rates. Your best move is to stay educated on current economic and political events – but if you are waiting for rates to drop again to purchase a home, with the currently available fixed rates, you probably shouldn't.

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