What is ahead for bor­row­ers, in­vestors?

Austin American-Statesman - - BUSINESS - By Christo­pher Ru­gaber and Alex Veiga

Are mort­gage rates headed up? How about car loans? Credit cards?

How about those nearly in­vis­i­ble rates on bank CDs — any chance of get­ting a few dol­lars more?

With the Fed­eral Re­serve hav­ing raised its bench­mark in­ter­est rate Wed­nes­day and sig­naled the like­li­hood of ad­di­tional rate hikes later this year, con­sumers and busi­nesses will feel it — maybe not im­me­di­ately, but over time.

The Fed’s think­ing is that the econ­omy is a lot stronger now than it was dur­ing the first few years af­ter the Great Re­ces­sion ended in 2009, when ul­tra-low rates were needed to sus­tain growth. With the job mar­ket in par­tic­u­lar look­ing ro­bust, the econ­omy is seen as sturdy enough to with­stand mod­estly higher loan rates in the com­ing months and per­haps years.

“We are in a ris­ing in­ter­est rate en­vi­ron­ment,” noted Na­ri­man Behravesh, chief econ­o­mist at HIS Markit.

Here are some ques­tion and an­swers on what this could mean for con­sumers, busi­nesses, in­vestors and the econ­omy: I’m think­ing about buy­ing a house. Are mort­gage rates go­ing to march steadily higher?

Hard to say. Mort­gage rates don’t usu­ally rise in tan­dem with the Fed’s in­creases. Some­times, they even move in the op­po­site di­rec­tion. Long-term mort­gages tend to track the rate on the 10-year Trea­sury, which, in turn, is in­flu­enced by a vari-

ety of fac­tors. These in­clude in­vestors’ ex­pec­ta­tions for fu­ture in­fla­tion and global de­mand for U.S. Trea­surys.

When in­fla­tion is ex­pected to stay low, in­vestors are drawn to Trea­surys even if the in­ter­est they pay is low, be­cause higher re­turns aren’t needed to off­set high in­fla­tion. When global mar­kets are in tur­moil, ner­vous in­vestors from around the world often pour money into Trea­surys be­cause they’re re­garded as ul­tra-safe.

Last year, for ex­am­ple, when global in­vestors wor­ried about eco­nomic weak- ness in China and the U.K.’s exit from the Euro­pean Union, they piled into Trea- surys, low­er­ing their yields and re­duc­ing mort­gage rates.

Since the presidential elec­tion, though, the 10-year yield has risen in an­tic­ipa- tion that tax cuts, dereg­ula- tion and in­creased spend­ing on in­fra­struc­ture will ac­cel- er­ate the econ­omy and fan in­fla­tion. The av­er­age rate on a 30-year fixed-rate mort

gage has surged to 4.2 per- cent from last year’s 3.65 per­cent av­er­age.

That rate in­crease sug­gests that mar­kets have al­ready priced in Wed­nes­day’s rate hike and that mort­gages might not re­spond im­medi- ately to the Fed’s an­nounce- ment. Un­less and un­til, that is, the Fed sig­nals that it plans to raise rates even faster than any­one ex­pects.

So does that mean home- loan rates won’t rise much any­time soon?

Not nec­es­sar­ily. In­fla­tion is near­ing the Fed’s 2 per­cent tar­get. The global econ­omy is im­prov­ing, which means fewer in­ter­na­tional in­vestors are buy­ing Trea­surys as a safe haven. And at least two more Fed rate hikes are ex­pected later this year. All those trends will likely lift the rate on the 10-year note over time and, by ex­ten­sion, mort­gage rates. It’s just hard to say when. Behravesh fore­casts that the av­er­age 30-year mort­gage rate will reach 4.5 to 4.75 per­cent by year’s end, up sharply from last year. But for per­spec­tive, keep in mind: Be­fore the 2008 fi­nan­cial cri­sis, mort­gage rates never fell be­low 5 per­cent.

“Rates are still in­cred­i­bly low,” Behravesh said.

Even if the Fed raises its bench­mark short-term rate three times this year, its key rate would re­main be­low 1.5 per­cent. “That’s still in the base­ment,” Behravesh said.

What about other kinds of loans?

For users of credit cards, home eq­uity lines of credit

and other vari­able-in­ter- est debt, rates will rise by roughly the same amount as the Fed hike within 60 days, said Greg McBride,

Bankrate.com’s chief fi­nan- cial an­a­lyst. That’s be­cause those rates are based in part on the banks’ prime rate, which moves in tan­dem with

the Fed. “It’s a great time to be shop­ping around if you have good credit and (can) lock in zero-per­cent in­tro­duc- tory and bal­ance-trans­fer of­fers,” McBride said.

Those who can’t qual­ify for low-rate credit card of­fers may be stuck pay­ing higher in­ter­est on their bal­ances be­cause the rates on their cards will rise as the prime rate does.

The Fed’s rate hikes won’t nec­es­sar­ily raise auto loan rates. Car loans tend to be more sen­si­tive to com­peti- tion, which can slow the rate of in­creases, McBride noted. At long last, will I now earn a bet­ter-than-measly re­turn on my CDs and money mar­ket ac­counts?

Prob­a­bly, though it will take time.

Sav­ings, cer­tifi­cates of de­posit and money mar­ket ac­counts don’t typ­i­cally track

the Fed’s changes. In­stead, banks tend to cap­i­tal­ize on a higher-rate en­vi­ron­ment to try to thicken their prof­its. They do so by im­pos­ing higher rates on bor­row­ers, with­out nec­es­sar­ily of­fer­ing any juicer rates to savers.

The ex­cep­tion: Banks with high-yield sav­ings ac­counts. These ac­counts are known for ag­gres­sively com­pet­ing to at­tract de­pos­i­tors, McBride said. The only catch is that they typ­i­cally re­quire sig­nif­i­cant de­posits.

“You’ll see rates for both sav­ings and auto loans trend

ing higher, but it’s not go­ing to be a one-for-one cor­re­la­tion with the Fed,” McBride said. “Don’t ex­pect your sav­ings to im­prove by a quar­ter point or that all car loans

will im­me­di­ately be a quar­ter-point higher.”

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