The strong rebound in the U.S. economy from the pandemic that has pushed inflation to its highest level in decades could push interest rates higher over the next year, according to a new survey from Bankrate.
Experts see the 10-year Treasury yield rising to 1.9% a year from now, according to the average forecast from Bankrate’s Third Quarter Economic Indicators Survey. Meanwhile, the majority of experts (63%) say the Federal Reserve will keep interest rates low over the next 12 months, although this is the smallest majority since the start of the coronavirus pandemic.
This article is the second in a four-part series analyzing the results of Bankrate’s Third Quarter Economic Indicators Survey. We asked experts where they see the labor marketunemployment, the Federal Reserve, the 10-year Treasury yield and inflation course over the next 12 months. We also asked experts about balance of risks facing the US economy and what currently keeps them awake at night.
Growing sentiment for higher rates over the next 12 months
While most pundits see the Fed holding rates steady over the next year, nearly a third (or 32%) are bracing for a rate hike. This sentiment has increased since previous iterations of Bankrate’s indicator survey, with 28% of experts in the second quarter and 19 percent of experts in the first quarter expecting a rate hike from the Fed. Back in the fourth quarter 2020no economist saw US central bankers raise interest rates in the next 12 months.
Expectations of a rate hike are also rising within the Fed itself. Half of the American central bankers in screenings from their September meeting predicted one increase for 2022, up from seven in June and four in March. Meanwhile, only one official predicted that rates would remain flat for 2023, according to these most recent projections.
The recent pace of rapid price increases is undoubtedly changing these monetary policy expectations. Over the past five months, consumer prices have risen at the fastest rate in 13 years, according to the Department of Commerce. Another measure of inflation favored by Fed officials rose in July at the fastest rate since the 1990s.
Coupled with the U.S. economy recovering to its pre-pandemic size and a labor market with record demand for workers, these conditions give the Fed more reason to withdraw support as soon as possible, according to the experts.
“The Federal Reserve is data dependent, and as long as the labor market and broader economic recovery remain on track, there is reason to believe a rate hike could occur in the future for 2022.” , says Odeta Kushi, deputy chief economist at First American. Financial Corp., which predicts that the Fed’s next move over the next 12 months will be to raise interest rates.
Economists who see the Fed leaving interest rates alone predict that U.S. central bankers would rather give the labor market more time to recover from pandemic-related disruptions, while the U.S. economy may need more juice as its sugar is high relative to record levels of monetary and fiscal stimulus wears out.
“With the delta wave slowing the recovery and inflation likely starting to decline next year, the Fed will have little incentive to raise rates and risk cooling the economy,” says Robert Frick, business economist at the Navy Federal Credit Union, which sees the Fed holding interest rates within its current target range of 0-0.25% for next year.
One respondent did not provide a Fed forecast.
What to expect from mortgage rates
But before the Fed starts raising interest rates, many expect a slow down to the number of bonds he buys first – measures that helped push mortgage rates to record lows during the pandemic. The Fed has been buying $120 billion worth of Treasuries and mortgage-backed securities each month, but said at its September meeting that a slowdown in the pace of those bond purchases could “soon” be justified.
Once the Fed stops buying bonds, the 10-year Treasury rate could rise. The yield is already in freefall, rising 56 basis points since the start of 2021 on the back of rising inflation and the post-pandemic recovery.
Analysts expect these increases in the 10-year Treasury yield to continue. Only two respondents see the benchmark yield holding at 1.5% or lower, which would be lower than where the interest rate closed on September 28, when the third-quarter polling period ended. Meanwhile, nine respondents (representing 47% of economists in the survey) see 10-year holdings at 2% or more, which would be the highest since July 2019.
While it’s not guaranteed that mortgage rates will skyrocket once the Fed declines and the 10-year Treasury yield rises, experts say Americans may want to prepare for a modest increase as the Fed begins to move away from its easy money policy.
“The very first move will be raising mortgage rates as the reduction in MBS (mortgage-backed securities) will begin by the end of the year,” said Lawrence Yun, chief economist at the National Association of Realtors.
What the experts say
what to do with your money
Americans should take action with their finances now, when interest rates are low, to prepare for when the Fed eventually rolls back its COVID-19-based accommodation.
- Pay off high-cost debt: If you have credit card debt, you’ll want to focus on getting rid of your overhanging balance now, when interest rates are low. Analyze how much you would save in interest if you transferred your debt to a balance transfer card.
- Don’t miss your chance to refinance: The owners have not yet missed their chance to get a better mortgage rate.
- Invest with a long-term mindset: Don’t overreact to markets that may be choppy as the Fed withdraws its extraordinary levels of support.
The Third Quarter 2021 Bank Rate Economic Indicators Survey of Economists was conducted from September 20 to 28. Survey requests were emailed to economists across the country, and responses were voluntarily submitted online. Responding were: Scott Anderson, executive vice president and chief economist, Bank of the West; Scott J. Brown, Chief Economist, Raymond James Financial; Ryan Sweet, director of real-time economics, Moody’s Analytics; Gregory Daco, Chief US Economist, Oxford Economics; Mike Fratantoni, Chief Economist, Mortgage Bankers Association; Yelena Maleyev, Associate Economist, Grant Thornton LLP; Lynn Reaser, Chief Economist, Point Loma Nazarene University; Odeta Kushi, Deputy Chief Economist, First American Financial Corp. ; Robert Frick, Business Economist, Navy Federal Credit Union; Bill Dunkelberg, Chief Economist, National Federation of Independent Business; Mike Englund, Chief Economist, Action Economics; Gus Faucher, Chief Economist, PNC Financial Services Group; Bernard Markstein, Chairman and Chief Economist of Markstein Advisors; Danielle Hale, Chief Economist, Realtor.com; Dan Manaenkov, National Forecasting Manager, University of Michigan; Lawrence Yun, Chief Economist, National Association of Realtors; Christopher Russo, Postdoctoral Fellow, George Mason University Mercatus Center; and Tenpao Lee, Professor Emeritus, Niagara University.