When Will Interest Rates Go Up?

Are You Ready for Higher Interest Rates?

when will interest rates go up
Higher interest rates will raise the cost of your new home. Photo: Sorbetto/Getty Images

Interest rates will continue rising through 2017. Rates for savings accounts, CDs, credit cards and mortgages rise at different speeds. That's because separate forces drive them. For more, see How Are Interest Rates Determined?

Short-term interest rates follow the fed funds rate.That's what banks charge each other for overnight loans of fed funds. The  Federal Open Market Committee raised it by 1/4 point at its June 14, 2017, meeting.

It is encouraged by steady growth, a positive jobs reports and healthy inflation. It's begun to incorporate the economic policies of President Trump. The FOMC began raising rates in December 2015. The current fed funds rate is 1.25 percent.

Long-term rates follow the 10-year Treasury yield. That has also risen in 2017. On  March 31,2017, it hit 2.62 percent. That's the highest since September 2014. As the economy improves, demand for Treasurys will fall. That increases their yields, as sellers try to make the bonds more attractive. That will drive up interest rates on long-term loans, mortgages and bonds. Take these Five Steps to Protect Yourself from Higher Interest Rates.

Savings Accounts and CDs

Interest rates for savings accounts and certificates of deposit track the London Interbank Offer Rate. That's the interest rate banks charge each other for short-term loans. Banks pay you a little less than Libor so they can make a profit.

Savings accounts follow the one-month Libor rate, while CDs follow longer-term rates. Libor is usually a few tenths of a point above the Fed funds rate. 

Credit Card Rates

Banks base credit card rates on the prime rate. It's what they charge their best customers for short-term loans. It rose to 3.75 percent right after the fed funds rate increased.

Banks can charge anywhere from 8 percent to 17 percent more for credit card rates, depending on your credit score and type of card

Home Equity Lines of Credit and Adjustable Rate Loans

The fed funds rate guides adjustable rate loans. These include home equity lines of credit and any variable rate loans. 

Auto and Short-Term Loans

Fixed interest rates on three to five-year loans don't follow the prime rate, Libor or the fed funds rate. Instead, they are about 2.5 percent higher than one, three and five-year Treasury bill yields. Yields are the total return investors receive for holding the bills.

The U.S. Treasury sells them at an auction for a fixed interest rate that loosely tracks the Fed funds rate. Investors can then sell them on the secondary market. Many other factors influence their yields. These include the demand for the dollar from forex traders. When demand for the dollar rises, so does demand for Treasurys. Investors will pay more to buy them. Since the interest rate doesn't change, the overall yield falls. For more on how this works, see Treasury Yields.

Demand for Treasurys also increases when there are global economic crises. That's because the U.S. government guarantees repayment.

All these factors mean interest rates on long-term debt aren't as easy to predict as those based on the fed funds rate. 

Mortgage Rates and Student Loans

Banks set fixed rates on conventional mortgages and a little higher than the yields on 10, 15 and 30-year Treasury notes and bonds. That means interest rates on long-term loans rise along with those yields. The same holds true for student loans. For more on how this works, see What Is the Relationship Between Treasury Notes and Mortgage Interest Rates.

Bonds

State, municipal and corporate bonds compete with U.S. Treasurys for investors' dollars. Since they are riskier than U.S. government bonds, they must pay higher interest rates. Here are more types of bonds.

Standard & Poor's rate the risk of default. Bond with the most risk, called high-yield bonds, pay the most return.

When Treasury yields rise, so do these bonds to remain competitive.