Kiplinger Interest Rates Outlook: Long-Term Rates Edging Down with Oil Prices
Analysts expect the Fed to raise short-term rates several times this year, but Chairman Warsh may surprise them.
Kiplinger’s Economic Outlooks are written by the staff of our weekly Kiplinger Letter and are unavailable elsewhere. Click here for a free issue of The Kiplinger Letter or to subscribe for the latest trends and forecasts from our highly experienced Kiplinger Letter team.
Long-term bond rates are edging down as crude oil prices drop, but they will still stay well above 4.0%, given potential inflation concerns. Ten-year Treasury rates are currently at 4.4%, down from 4.6% in May, but still well above the 4.0% they were at before the war. Given the uncertainties of how inflation will progress after gasoline prices ratchet back down, they are likely to stay close to the mid-4 range.
The Federal Reserve kept its benchmark short-term interest rate unchanged at 3.5% to 3.75% at its policy meeting on June 17. New Fed Chairman Kevin Warsh sounded hawkish, stating emphatically that he and the policy committee would deliver price stability. That caused a number of analysts to raise their predictions for short-term interest rates, believing that the Fed would raise rates more than once later this year. However, these analysts may be underestimating Warsh’s belief that he can use alternative methods to fight inflation, so that he won’t have to raise rates. In the past, Warsh has expressed optimism that stronger productivity growth resulting from the artificial intelligence revolution will make rate increases unnecessary. He has also talked about using balance sheet reductions instead of raising rates in order to tighten policy. Warsh spent the majority of his June 17 press conference touting the various task forces he is setting up at the Fed to analyze and reexamine previous monetary policy assumptions. He is likely to resist making any large changes in rates before his task forces have a chance to report.
From just $107.88 $24.99 for Kiplinger Personal Finance
Become a smarter, better informed investor. Subscribe from just $107.88 $24.99, plus get up to 4 Special Issues
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
However, Warsh is but one member of the policy committee, called the Federal Open Market Committee, or FOMC. Half of committee members indicated through the “dot plot” graph that they expected at least one rate hike would be needed this year to combat inflation momentum created by the sharp rise in oil and gasoline prices. This will be a test case for Warsh: Should he go along with likely majority sentiment on the committee this year, or dig in his heels and keeps rates steady? When one reporter pointed out that rate hikes would be necessary to fight inflation, Warsh shut him down, indicating that he is not ready to bow to that reality quite yet. Warsh’s evolution in his first year of chairmanship will be quite interesting. He did indicate one area of agreement with former Chairman Jerome Powell, however, when he declared that the Fed would remain independent of political influence.
Mortgage rates are easing slightly as the price of energy comes down. Thirty-year fixed-rate mortgages are currently around 6.5%. Fifteen-year loans are at 5.8% for borrowers with good credit. Rates may tick down slightly in the short term, following the 10-year Treasury rate, but odds are that mortgage rates will end 2026 close to where they are today.
Top-rated corporate bond yields have also been following Treasury yields. AAA-rated long-term corporate bonds are yielding 5.1%, BBB-rated bonds are at 5.4%, and CCC-rated bonds are at 13.8%. CCC bond rates tend to rise when the risk of an economic slowdown rises, and fall when either the economy strengthens or the Fed cuts rates, which eases financing costs for businesses that are heavily indebted.
Related Content
