Short Rates Likely Staying Near Zero Through 2023
Kiplinger’s latest forecast on interest rates
The Federal Reserve at its recent Federal Open Market Committee meeting recommitted itself to keeping short-term interest rates near zero for the foreseeable future, which likely means through 2023. The Fed is also continuing to purchase $80 billion of Treasury securities and $40 billion of mortgage-backed securities every month, adding to its balance sheet. The Fed is “all in” to do whatever it takes to support the economy. Its leaders even added a statement to the meeting report that they will be willing to tolerate inflation levels above 2% for a time. That means that they will not raise short-term rates even if inflation begins to pick up, but left unspecified when they would act to curb inflation.
The 10-year Treasury yield has risen only modestly off its record low of 0.5%. While it is not likely to move lower, it should stay well below 1% for a long time, given how uncertain the progress of the economy’s recovery will be. Short-term rates will likely stay near zero for even longer — rates on 3-year Treasury notes are currently almost the same as rates on 1-month bills.
Average 30-year mortgage rates are likely to stay slightly below 3% for a while, and 15-year rates, a bit below 2.5%. Rates have been edging down closer to their normal relationship with the 10-year Treasury rate, now that refinancing applications have declined and lenders have to offer lower mortgage rates to attract more business. However, the gap with Treasuries is still nearly half a percentage point above its historical norm.
