Kiplinger’s Interest Rates Outlook: Rates Likely to Rise Again After Banking Crisis is Over

The Fed may cut its rate-hiking plans short, but not by much.

Illustration of interest rates
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Interest rates across the yield curve are still depressed because of fresh worries about the banking system but are likely to begin edging back up again if no surprises happen in the form of additional bank failures. The government’s move to extend deposit insurance to all depositors at Silicon Valley Bank and Signature Bank appeared to have stopped the immediate crisis in the United States. But then the other shoe dropped with the run on the Swiss bank Credit Suisse on March 15. The Swiss government arranged for UBS to take over Credit Suisse. Today, there are fresh concerns about Deutsche Bank in Germany. That means that investor fears regarding the banking sector are not over yet.

But the Federal Reserve is confident enough in the U.S. banking system that it raised short-term interest rates by a quarter-point at its March 22 policy meeting, in order to continue to fight inflation. Expect the Fed to raise the federal funds rate by a quarter of a point at its May 3 and June 14 policy meetings, too. But Chair Jerome Powell did say that rate hikes would no longer be automatic and that the Fed was evaluating current events. At the moment, the Fed is treating the banking issues as likely to tighten credit by the equivalence of one additional quarter-point hike. That means the central bank will shorten its rate hiking campaign by six weeks, which is the length of time between meetings and may adjust it further (longer or shorter) depending on how the banking situation plays out. Powell is looking for progress in two areas before he calls for a permanent pause in rate hikes: A softening of the labor market and wage increases and slowing price increases in services other than housing (housing costs are already softening). 

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Long-term interest rates will likely remain below their recent peak this year, as the economy slows and the inflation rate comes down. Monthly data releases on the Consumer Price Index (the next CPI report is due on April 12), jobs (next due on April 7) and other indicators are likely to have an outsize impact on movements in the financial markets. 

Falling long-term rates and rising short-term rates have created quite the inversion in the yield curve this year, with short rates now a full percentage point higher than long ones. However, this may reverse, possibly next year, as a strengthening economy boosts long rates and as the Fed cuts short-term rates if its inflation fight is won.

For now, other short-term interest rates will rise along with the federal funds rate. Rates on home equity lines of credit are typically connected to the fed funds rate and move in lockstep with it. Rates on short-term consumer loans such as auto loans will also be affected. Rates to finance vehicles are around 7%, for buyers with good credit. 

Mortgage rates will stay elevated until there is more progress in the inflation fight. 30-year fixed-rate mortgage loans are at 6.6%, after peaking at 7.1% in early November, while 15-year fixed-rate loans are around 5.9%. Mortgage rates react to changes in the 10-year Treasury yield, though they are still about a full percentage point higher in relation to the 10-year Treasury note than would normally be expected. Mortgage rates tend to stay higher for longer when inflation is high, whereas Treasury rates tend to be more sensitive to signs of economic slowing. 

Corporate high-yield bond rates peaked in November last year. The banking issues caused investors to favor higher-quality bonds. AAA bonds are now yielding 4.3% and BBB bonds, 5.5%, while CCC-rated bond yields are at 15.2%. As stability returns, AAA rates should edge up, and CCC rates should move down a bit. 

Source: Federal Reserve Open Market Committee (opens in new tab)

David Payne
Staff Economist, The Kiplinger Letter
David is both staff economist and reporter for The Kiplinger Letter, overseeing Kiplinger forecasts for the U.S. and world economies. Previously, he was senior principal economist in the Center for Forecasting and Modeling at IHS/GlobalInsight, and an economist in the Chief Economist's Office of the U.S. Department of Commerce. David has co-written weekly reports on economic conditions since 1992, and has forecasted GDP and its components since 1995, beating the Blue Chip Indicators forecasts two-thirds of the time. David is a Certified Business Economist as recognized by the National Association for Business Economics. He has two master's degrees and is ABD in economics from the University of North Carolina at Chapel Hill.