Going into the third quarter of 2013, it looked reasonable to predict that interest rates would rise for the remainder of the year. Now it looks more like rates may remain close to where they are today. What has changed?
A darkening outlook A number of things changed from the beginning of the third quarter to the beginning of the fourth quarter:
- Economic momentum has stalled. Most crucially, job growth has slowed in recent months. This shows that employers aren't confident, and it means there won't be as many new paychecks pumping dollars into the economy.
- Inflation has cooled. Inflation flared up in June, but has quickly subsided. This isn't all bad news, but it is beginning to look as though languishing prices are just one more symptom of a weak economy.
- The budget and debt-ceiling standoffs will dampen growth. No matter how long these showdowns last, failing to fund the government takes money out of the economy and undermines confidence.
- The Fed has recommitted to low interest rates. Who said anything about tapering? The Fed seems to have backed away from earlier hints that reductions in its bond-buying program were imminent, and may be unlikely to make a major change during the transition from Ben Bernanke to his successor.
- The climate of uncertainty has returned. The year began under a cloud of uncertainty about sequestration. It ends with further uncertainty about the budget and the implementation of Obamacare. Uncertainty is bad for business.
The impact on bank ratesUnder these circumstances, it would be easy to forecast a decline in deposit rates on savings accounts, money market accounts and CDs -- if those rates weren't already near zero. A few months ago, with the economy heating up and competitiveness increasing among online savings accounts, it appeared that these rates were poised for a rise. With the economy looking more doubtful, banks are going to be very slow to raise rates. That leaves switching accounts as the sole possible means for consumers to obtain higher rates.
On the lending side, current mortgage rates are about a full percentage point higher than they were earlier this year, which would suggest they have room to fall back now that the economic outlook is cloudier. Remember though, that mortgage rates represent a 15- or 30-year commitment. Lenders will always be quicker to raise rates than to lower them, so don't count on a return to previous mortgage rate lows.Normally, savers and borrowers are on opposite sides of the interest rate fence. However, with deposit rates a long shot to make much progress and mortgage rates unlikely to get as low as they were a few months ago, it might just be a lose-lose scenario for consumers with respect to interest rates for the remainder of this year.