Will Interest Rates Spike in 2013? George Soros Believes Rates are Moving Higher
In an interview on CNBC, the legendary financier, George Soros, said there will be a dramatic increase in interest rates this year once there are clear signs the economy is picking up steam. Interest rates have been at record lows the past four years; the Federal Reserve is the main reason for low rates since they have kept the fed funds rate near zero percent to help lower the unemployment rate and foster growth.
The fed's policy has brought rates on interest-bearing investments down to record lows. CD rates on 1 year certificates of deposit are just north of 1 percent, savings rates and money market rates are also just above 1 percent. The common belief is that interest rates will stay low until mid-2015, the time that the fed is expected to keep the fed funds rate near zero percent.
George Soros said in the interview "Once the economy gets going, then interest rates are going to take a big leap." He also said "It may already have begun." Back in December of 2012, 10 year bond yields were just above 1.50 percent, last week yields moved above 2.00 percent, a 33 percent increase in yields. Mortgage rates have also moved up the past month, 30 year mortgage rates moved to the highest point since September of 2012.
Holders of interest-bearing assets like certificates of deposit have been suffering with low CD rates for years now. Short term rates and long term rates have all moved down to record lows. The best CD rates on 5 year certificates of deposit are around 1.75 percent and the highest CD rates on 3 month certificates of deposit are at 0.65 percent.
Any increase in CD rates would be welcome news and a major increase in rates would be a godsend, especially to retirees who rely on interest income. Unfortunately, an increase in interest rates will also mean higher mortgage rates. A sharp increase in rates would have a negative effect on the housing market and economy.
While we welcome an increase in rates for depositors, too quick of an increase could slow the economy and force interest rates down once again. The fed has a delicate act ahead of slowing and eventually stopping purchases of mortgage-backed securities. Once the fed is finished with their accommodating stance of stimulating the economy, they then have to unwind their balance sheet.
Any quick moves could also slow growth dramatically, which would send interest rates lower again. While we don't necessarily believe interest rates will move dramatically higher in 2013, rates will be moving higher before mid-2015. You should stay invested in shorter term certificates of deposit so you can take advantage of higher CD rates when they arrive.
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