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Economic Forecasts

Interest Rates Headed Higher — Eventually

Kiplinger's latest forecast on interest rates

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GDP 3.0% pace in '18, up from 2.3% in '17 More »
Jobs Slower job gains likely this year as labor market tightens More »
Interest rates 10-year T-notes at 3.2% by end '18 More »
Inflation 2.6% in '18, up from 2.1% in '17 More »
Business spending Up 7% in '18, boosted by expanded tax breaks More »
Energy Crude trading from $60 to $65 per barrel in June More »
Housing Price growth: 5.0% by end of '18 More »
Retail sales Growing 4.2% in '18 (excluding gas and autos) More »
Trade deficit Widening 5%-6% in '18 More »

Stock market volatility is arresting interest rates’ climb, but rates are still heading up in the end. When stock prices have retreated in the past few months, rates have dipped as investors sought a haven in Treasuries. But rising government deficits and slightly higher inflation will likely keep rates on a gradual upward trend.

The Federal Reserve is committed to raising short-term rates this year and next because it’s concerned about the tightening labor market. The Fed very much wants to stay ahead of any inflation that rising wages may generate and will lift short-term rates by a quarter of a percentage point twice more in 2018 (in June and December), following March’s hike. That would put the federal funds rate at 2.25% heading into 2019, when another three to four increases are expected.

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We think today’s 2.8% yield on the 10-year Treasury note will hit 3.2% by year-end. The bank prime rate that auto loans and home equity loans are based on will bump up from 4.75% to 5.25%. The 30-year fixed mortgage rate is likely to go up to 4.7% from today’s 4.4%. The 15-year fixed mortgage rate should rise to 4.2% from today’s 3.9%.

Higher interest rates are finally coming to savers. Although big banks have been slow to raise deposit rates, rates on money market accounts and CDs at smaller banks, credit unions and online banks have picked up to nearly match rates on Treasury bills and notes.

Source: Federal Reserve, Open Market Committee

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