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Economic Forecasts

Long Rates Look to Stay Low for a While

Kiplinger's latest forecast on interest rates


GDP 2.5% growth in '19, down from 2.9% in '18 More »
Jobs Unemployment rate will decline to 3.4% by end '19 More »
Interest rates 10-year T-notes at 3.6% by end ’19 More »
Inflation 2.3% in ’19, up from 1.9% in ’18 More »
Business spending Up 5% in ’19 as global growth slows More »
Energy Crude trading from $65 to $70 per barrel in March More »
Housing 5.35 million existing-home sales in ’19, down 0.4% More »
Retail sales Growing at least 4% in ’19 (excluding gas and autos) More »
Trade deficit Widening 7%-8% in ’19 More »

Long-term interest rates dropped this week as the market didn’t get the reassurance it was seeking. Although the Federal Reserve Board curtailed its planned 2019 rate hikes from three to two, it seems committed to reaching a federal funds rate buffer of about 3%, which it could cut whenever recession hits. Fed Chairman Jerome Powell also said the central bank won’t slow the rate at which it reduces its securities holdings. Long rates fell for two reasons: market worries that the Fed will react too late to a slowing economy, and a flight to safety from stocks into bonds, driving bond prices up.

However, the market may not be giving Powell credit for setting the stage for the end of once-a-quarter rate hikes next year. The Fed may pull the trigger again in March and June, or it may spread out the hikes through the year. In either case, once the Fed achieves its goal, it is likely to halt there for a long time.

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Although the yield curve is flattening, we do not expect an inversion (when short rates are higher than long rates) for the critical 10-year-to-three-month rate comparison, even with the Fed’s expected hikes of short rates next year. A yield curve inversion is often cited as a recession indicator, but the relationship is not close, so the recession can come much later.

We expect 10-year rates to stay below 3% for a while. This ought to help the housing market by delaying further increases in mortgage rates. But expect 10-year rates to move up to 3.2% by the end of next year. Today’s “flight to safety” will end. And fatter paychecks may pressure long rates enough to increase them. By the end of 2019, the 30-year fixed-rate mortgage will likely come with an interest rate of 5%, and the 15-year fixed-rate mortgage should rise to 4.4%.


The Fed’s hikes of short rates will bump up the bank prime rate that auto loans and home-equity loans are based on from today’s 5.5% to 6% heading into 2020.

Source: Federal Reserve Open Market Committee

See Also: America’s Yield Curve Panic Is Overdone