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Sunday, 21 December 2014 22:00

Interest rates should rise, but not enough to adversely impact economy, experts say

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Interest rates in 2015 will likely begin moving up from their historic low levels, although they should still remain relatively low, economists say.

As the U.S. economy begins to pick up and as inflation remains in check, the Federal Reserve plans to stop buying bonds in 2015 and will probably begin nudging up interest rates during the next year. Many economists see that occurring midway through 2015.

Mitch Stapley, chief investment officer at ClearArc Capital Inc. in Grand Rapids, believes that it may come a little later.

Low inflation allows the Federal Reserve “to be very patient in terms of raising rates,” he said.

“In fact, we expect them to start raising rates probably a little later than what the general consensus on the Street is — third quarter, maybe fourth quarter of 2015,” Stapley said. “The middle part of the year, where the Street consensus seems to be, seems to be rushing it.”

When interest rates do begin moving upward, Stapley doubts they’ll go far. Economic problems in Japan and Europe will spur action by central banks there that drive investors to foreign bonds in the U.S., keeping a lid on how much interest rates may climb, Stapley said.

“While the Fed may begin to look at raising rates late next year — and the economy will be doing better, sure — that could put some modest upward pressure on our rates here, but I’ve got some big factors internationally that are going to help weigh down on rates,” Stapley said. “It’ll be good news for the consumer.”

Stapley “would be very surprised” if interest rates on 10-year Treasury notes, now at 2.23 percent, were to move to 3 percent by the end of 2015, and “we’re not going back to 4 percent anytime soon,” he said.

For instance, an increase in yields for short-term or intermediate municipal bonds to the level they were at seven or eight years ago is “just not in the cards, in our estimation, for 2015,” Stapley said.

In its latest economic briefing, economists at Comerica Inc. expect 10-year treasury notes to move to 3.14 percent by the fourth quarter of 2015 and to 3.43 percent for 2016. Rates will move up as well for 30-year fixed mortgages, from an average of 3.6 percent now to 4.40 percent in the fourth quarter of 2015, Comerica projects.

For consumers and commercial borrowers, the move in interest rates could affect the cost of credit, “but not a lot,” Stapley said.

“The problem has been more of available credit than the cost of credit. The good news is that lenders will probably get a little more willing to lend next year,” he said. “Rates, even if they go up a little, are still going to be pretty low from a historical standard.”

Paul Traub, an economist with the Detroit branch of the Federal Reserve Bank of Chicago, told members of the CFA Society of West Michigan during a November presentation that he expects short-term interest rates to remain low for the near term.

With low inflation coming out of the recession, excess capacity, excess labor and low wage growth, “we feel from the perspective of the Fed that we can continue to be somewhat proactive with low short-term rates, even though one might argue it’s time for us to move up,” Traub said. “We’re really not going to think about raising short-term rates any time soon. They’re going to stay low for a while.”

One potential consequence from any change to interest rates is the reaction of consumers, Traub said. Consumers have come to expect that low interest rates are the “new normal,” and they could react negatively to any upward change, he said.

“It’s the relative change that’s important in the minds of consumers,” he said, “and that could have some impact going forward.”

Read 2362 times Last modified on Sunday, 21 December 2014 22:15

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