What happens next with interest rates?
Anyone wanting to buy a house with a home mortgage loan right now is wishing interest rates would come down. But is that likely to happen? And if so, when?
People are also wondering: “Why have mortgage interest rates increased so much in 2022 and 2023?”
Because inflation has been raging. In response to that, the Fed raised interest rates to bring it under control.
The thirty-year mortgage interest rate hit 7.2% in August, 2023, marking the highest rate in more than 20 years. This was done purposely to rein in spending. When there’s less spending, inflation cools.
Thinking back: Following the global financial crisis, rates were dropped to stimulate the economy. Now it appears to been over-stimulated, possibly by the “stimulus money” and abundant unemployment benefits that were distributed to citizens in response to the pandemic shutdowns. This influx of money, together with increased fuel prices, brought about inflation. Now interest rates have been raised higher than anticipated because the increase has not been working as well as expected.
Housing has taken a severe hit, but other sectors of the economy have been slower to respond. Many financial experts believe that household savings and a greatly increased use of credit card debt has kept other spending moving along. That should change over the coming months, when we’ll see a sharp drop in spending in other parts of the economy.
What about the yield-curve inversion?
First, what is a yield-curve inversion? It is the situation that comes about when short-term (2 year fed-funds) bonds yield a higher rate than long-term (10 year Treasury) bonds.
I expect the current situation to hold steady as long as the yield-curve inversion holds.
Will interest rates fall?
Hopefully, the last rate hike was in July. Then, again hopefully, the Fed will begin cutting the fed-funds rate after its first 2024 meeting in February.
An inflation rate of 2% is the goal. When that happens, which they hope will be by the end of 2025, the concern will shift to shoring up economic growth. At that time, we expect to see the 30-year home mortgage rate drop to about 4.5%. So far, the average for 2023 is 6.75%.
As for inflation…
Many of us do expect inflation to drop drastically. In fact, it may well fall below the target of 2% and average only 1.8% from 2024 through 2027.
Since everything is tied together, the GDP is also affected by interest rates.
We believe that if the fed shifts to easing the rates by the end of this year, the GDP should start to accelerate in 2024 and 2025. Of course, if that doesn’t happen, then we’ll see the fed raising rates higher than we expect in order to cause a short-term recession.
Housing is a major component of the GDP, and is the most interest-rate sensitive. Thus, we’re hoping to see lower rates in order to enable more consumers to obtain mortgages.
It’s a tough call for many consumers, since higher interest rates may lessen demand and thus reduce home prices in some markets. The question for them will be “Do I buy now and refinance when interest rates drop, or should I hold off because prices will come down and I could get stuck with an upside-down mortgage?”
Looking to the future, we’re choosing optimism…
We believe the fed funds rate will fall below what many investors are expecting, and we believe inflation will fall faster than the Fed expects. If we’re right, then the Fed will cut interest rates more than current projections would indicate.
Following rate cuts, we expect to see GDP growth.
This should begin to happen approximately 9 months from now and continue on into 2025, 2026, and 2027. As supply constraints ease, the GDP should grow without triggering inflation again. We expect to see about 3% more growth than the consensus of opinion expects.
While we are still experiencing shortages in durable goods, energy, and automobiles, we believe those shortages could shift into gluts in just a few years. If we’re right, inflation will fall.
What does the future hold for interest rates?
Right now, the forecast is focused on the Fed and what it will or won’t do to reduce inflation. That’s the short run.
In the long run, the Fed will be less important and interest rates will be determined by other aspects of the economy. For decades, forces such as age demographics, productivity growth, and economic inequality have played a role by creating an excess of savings over investment. These forces haven’t gone away. They’ve simply taken a temporary back seat to more forceful and chaotic forces.
The tide will turn, and we believe interest rates will come down and stay down for quite some time.
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