The US economy has recovered from the economic recession, but with all the money that has been pumped in by the government, it is now facing the problem of inflation. The Federal Reserve is taking several steps to deal with inflation without touching benchmark interest rates. For example, it has stopped purchasing mortgage-backed securities, which will reduce the rate at which money is entering the economy.
But as inflation continues to rise, eventually the interest rates will have to be increased to keep it in check. The combination of higher prices and unemployment could be disastrous and it is unlikely that the Fed would allow inflation to get out of control.
People who have huge debts or those who are planning to get a debt in the near future would be negatively affected by higher interest rates. Some predictions about the level to which interest rates will rise can help you make important financial decisions.
Credit Card Debts
Credit card interest rates have been climbing steeply since 2008 end, and they have climbed from 12.03% to 14.26% in this period. The present credit card rates are the highest in the last nine years, and they are expected to increase to 16% by the fourth quarter. There is some relief for consumers, as card issuers can change interest rate only for future payments and not for existing debt. But rising rates would be bad news for credit issuers because of a decrease in credit demand.
Interest rates for auto loans are also going up and they increased to 6.45% in February from 7.77% in 2007 for two-year loans. The rates show signs of stabilizing and their effect is somewhat reduced as many incentives are being offered by car dealers to get customers back.
Interest rates on mortgage loans started going up recently with the average rate for a 30-year mortgage increasing to 5.2% and fixed rate mortgage reaching 5.21%. It is expected that mortgage rates will increase further and might touch 6% in the next few months.
There would be an impact if you have just bought a house and have a variable interest mortgage or if you are planning to buy a house soon. Higher rates will harm the overall real estate market, as demand for houses will decline further. But if you are looking to buy a house now, you may be able to benefit from lower prices.