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Economic Forecasts

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.

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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.

Source: Federal Reserve Open Market Committee

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