Long-term rates will edge higher

When the Federal Reserve signaled in June that it expects to raise short-term interest rates by the end of 2023 — sooner than an earlier forecast — the response was immediate and fierce.

The Dow Jones Industrial Average dropped more than 800 points, and the price of the 10-year Treasury note also dropped, increasing the yield to nearly 1.6%. Fixed rates on 30-year mortgages rose above 3% for the first time since April.

The backdrop to all this worrisome news was rising inflation, which prompted some to recall the dark days of the early 1980s, when the Fed raised interest rates sharply to curb it. Back then, homebuyers were lucky to lock in a 30-year mortgage for less than 12%.

But something strange has happened in the weeks since the Fed announcement: 10-year Treasury note yields have fallen back, and with them, rates for 30-year mortgages. As of mid-August, the average rate for a 30-year mortgage was 2.87%.

Economists attribute the lull in mortgage rates to several factors, ranging from worries about whether the rise in the COVID-19 delta variant could curb economic growth to a growing consensus that the inflation spike is a short-term phenomenon.

“Investors are buying into the idea that a lot of the very strong inflation figures are due to transitory factors,” such as slowdowns in supply deliveries, says Matthew

Speakman, an economist for real estate website Zillow.

Still, interest rates will eventually head higher (although nowhere near what we saw in the 1980s). The average rate for a 30-year mortgage is expected to rise to 3.3% by the end of 2021 and move up to 3.8% by the end of 2022.

That means homebuyers, who are dealing with limited supply, probably don’t need to scramble to lock in a rate. Short-term interest rates, which determine rates on credit cards and home-equity lines of credit, are expected to remain near zero through 2022. That’s good news for borrowers — assuming they can get a loan. Several major banks, including Wells Fargo, JPMorgan Chase and Citibank, halted new home-equity lines of credit during the pandemic and have yet to resume their offerings.

Credit card issuers, on the other hand, are eager to sign up customers, particularly because many borrowers used their stimulus checks or savings on canceled vacations to pay off balances during the pandemic. Credit card rates are still much higher than rates on other loans — the average rate is about 16% — but many issuers are looking to entice new customers by expanding their rewards programs.

Meanwhile, the only good news for savers is that rates on savings accounts, certificates of deposit and other safe parking places probably won’t fall any more, says Ken Tumin, founder of DepositAccounts.com. The average rate for bank online savings accounts is about 0.45%, and major brick-and-mortar banks are paying even less than that. Locking up your money in a CD won’t boost your yield: The average rate for a one-year CD is just 0.17%, and you’ll get only 0.31% on a five-year CD, according to Bankrate.com.