What is going on with interest rates?

What is going on with interest rates?

What is going on with interest rates? It's a volatile time in the long term interest rate market and here's my take on it as well as the prime rate. The prime rate and long term interest rate are two different things.

 

When the public hears the Feds raised the prime most of them react in thinking home mortgage rates are up too. Sometimes that is the case but the fact is the prime rate goes up or down as the Feds see fit to react to such reports as inflation, consumer confidence, productivity, etc. A strong economy will deem the prime rate can be raised. The feds meet periodically and lay out what they expect to happen. For instance they may indicate they expect to raise the prime three times in a year but ultimately do more or less. Sometimes there is a tepid change of 1/8 a point and with stronger data it is more. Often the prime rate change is a reaction to inflation. 

The expectation is that the Feds will raise the prime rate at least one more time this year.  Variable rates such as credit cards and home equity rates can be affected immediately dependent upon the terms of the contract. 

 

Long term interest rates such as a 15 year or 30 year fixed mortgage don't necessarily go up simultaneously with the prime increase. These rates go up or down nearly daily based on current economic news. If the economic news is positive generally rates will increase. If news is negative then long term rates may improve. Strength of the labor market, unemployment, natural disasters that require rebuilding, productivity, consumer confidence, overseas news, oil prices, and investor stomach for buying bonds are all things that affect rates on a daily basis. 

What is going on with interest rates? So far this year the positive reports have outweighed the negative which have driven up interest rates.  How sustainable is the current environment? That is where the crystal ball would be helpful. No one knows. I subscribe to a couple of sources who regurgitate the daily economic news and project what may happen one day at a time.

Any single action can cause long term rates to change substantially or just a little. We know what the usual factors are, but sometimes there appears to be no reason. This year long term rates have been on a trajectory toward higher and higher rates based on strong economic data primarily. When this data takes a serious downturn we will see the upswing falter. Hindsight is 20/20. A year ago no one expected rates to go as high as they are headed. Higher rates were expected but not at this level. Having stated this, an in depth discussion about rates would surely give someone an opportunity to talk about the adjustable rates that were in the teens in and around 1980. 

What is going on with rates at the moment is strong economic data is in the driver's seat.

Comment balloon 0 commentsDora Griffin • October 12 2018 03:33PM

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