Kiplinger’s Interest Rates Outlook: Rates Likely to Rise Again After Banking Crisis is Over

If the Fed pauses rate hikes, the pause will be brief.

Illustration of interest rates
(Image credit: Getty Images)

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Rates across the yield curve fell March 13-15, but are likely to begin edging back up again if no more shoes drop in the form of additional bank failures. The government’s move to extend deposit insurance to all depositors at Silicon Valley Bank and Signature Bank appears to have stopped the immediate crisis in the U.S. But then another shoe dropped with the run on the Swiss bank Credit Suisse on March 15. Swiss banking authorities are vowing to backstop the bank, which may stop the run. Today, there are expectations large U.S. banks will inject funds into First Republic Bank. But, there could be more market turmoil in the coming days.

As a result, the Federal Reserve may not hike rates at its meeting on March 22. But, once stability has returned, both are likely to continue their rate-hiking campaigns to fight inflation, which is still running at a hot 6% pace in the U.S. Expect the Fed to at least raise the federal funds rate by a quarter of a point at its May 3 and June 14 policy meetings.

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Chair Powell of the Fed is looking for progress in two areas before he calls for a permanent pause in rate hikes: A softening of the labor market and wage increases, and slowing price increases in services other than housing (housing costs are already softening). He acknowledged the slowing of inflation in goods, and that slowdowns in rent increases would show up in inflation measures later, but emphasized that it would be more costly to stop rate hikes too early than too late. Powell might relent if the economy starts showing a lot of weakness, but he clearly hopes that the data will improve over the next few months so that he won’t have to choose between policy options.

Long-term interest rates will likely remain below their recent peak this year, trending down gradually as the economy slows and as the inflation rate comes down. Monthly data releases on the consumer price index ( next CPI report is due on April 12), jobs (next on April 7) and other indicators are likely to have an outsized impact on movements in the financial markets.

Falling long-term rates and rising short-term rates have created quite the inversion in the yield curve this year, with short rates now 1.2 percentage points higher than long ones. However, this may reverse, possibly next year, as a strengthening economy boosts long rates and as the Fed cuts short-term rates if its inflation fight is won.

For now, other short-term interest rates will rise along with the federal funds rate. Rates on home equity lines of credit are typically connected to the fed funds rate and move in lock-step with it. Rates on short-term consumer loans such as auto loans will also be affected. Rates to finance new and used cars are around 6% to 7% for buyers with good credit.

Mortgage rates will stay elevated until there is more progress in the inflation fight. 30-year fixed-rate loans are at 6.8%, after peaking at 7.1% in early November, while 15-year fixed-rate loans are around 6.0%. Mortgage rates react to changes in the 10-year Treasury yield, though they are still about a full percentage point higher in relation to the 10-year Treasury than would normally be expected. Mortgage rates tend to stay higher for longer when inflation is high, whereas Treasury rates tend to be more sensitive to signs of economic slowing.

Corporate high-yield bond rates peaked in November last year. The Silicon Valley Bank episode caused AAA bond rates to decline, and junk bond rates to rise a bit, but these should return to their previous levels by next week. AAA bonds are now yielding 4.5% and BBB bonds, 5.7%, while CCC-rated bond yields are at 15.0%. As stability returns, AAA rates should edge up, and CCC rates should move down a bit.

Source: Federal Reserve Open Market Committee (opens in new tab)

David Payne
Staff Economist, The Kiplinger Letter
David is both staff economist and reporter for The Kiplinger Letter, overseeing Kiplinger forecasts for the U.S. and world economies. Previously, he was senior principal economist in the Center for Forecasting and Modeling at IHS/GlobalInsight, and an economist in the Chief Economist's Office of the U.S. Department of Commerce. David has co-written weekly reports on economic conditions since 1992, and has forecasted GDP and its components since 1995, beating the Blue Chip Indicators forecasts two-thirds of the time. David is a Certified Business Economist as recognized by the National Association for Business Economics. He has two master's degrees and is ABD in economics from the University of North Carolina at Chapel Hill.