Last week, we wrote that the era of low interest rates had finally run its course.
Since then, the national media has been chock full of stories touting the recovering U.S. economy, which will trigger a hike in interest rates to pay off increasing federal government debt and to stave off inflation.
It’s a fair argument to make. Certainly mortgage rates (see chart below) are on the way up, with the 30-year-fixed mortgage rate climbing to 5.305% last week, according to BankingMyWay’s Weekly Mortgage Rate Tracker.
For some perspective, the average 30-year rate back in December 2009, was about 4.7%. Now, professional rate watchers expect that number to hit 6% by the end of 2010. But it’s not just mortgage rates. Both credit card rates (up to 14.26%, the highest rate since 2001) and auto rates (up to 4.72% from 3.26% in December 2009) are up significantly, as well.
But there is a caveat. If the economic recovery isn’t sustainable, or (more likely) moves at a glacial pace, the Federal Reserve likely won’t play along by hiking its prime interest rate. In a weekend survey of leading U.S. economists, most don’t expect the Federal Reserve to hike interest rates until the end of 2010.The AP’s quarterly economic survey also reveals the following recovery-threatening estimates:
- The unemployment rate will stay stubbornly high the next two years. It will inch down to 9.3% by the end of 2010 and to 8.4% by the end of 2011. The rate has been 9.7% since January. When the recession started in December 2007, unemployment was 5%.
- Home prices will remain almost flat for the next two years, even after plunging an average 30% nationally since the peak in 2006. The economists forecast no rise this year and a 2.3% gain next year.
- The economy will grow 3% this year, which is less than usual during the early phase of a recovery and the reason unemployment will stay high. The AP says it takes growth of 5% for a year to lower the jobless rate by 1%.