When Will Interest Rates Go Up?

Are You Ready for Higher Interest Rates?

when will interest rates go up
••• Photo: Sorbetto/Getty Images

Interest rates will continue rising into 2020. But rates for savings accounts, mortgages, certificates of deposit, and credit cards, rise at different speeds. Each product relies on a different benchmark. As a result, increases for each depend on how their interest rates are determined.

All 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 the fed funds rate by a quarter point at its September 26, 2018, meeting. The Committee is encouraged by steady economic growth, positive jobs reports, and a healthy inflation rate.

The current fed funds rate is 2.25 percent. The Committee began raising rates in December 2015, after the recession was safely over.

Long-term rates follow the 10-year Treasury yield. As of September 26, 2018, it was 3.06 percent. As the economy improves, demand for Treasurys falls. The yields rise as sellers try to make the bonds more attractive. Higher Treasury yields drive up interest rates on long-term loans, mortgages, and bonds. But there are five steps that protect you 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's three percentage points higher than the fed funds rate. Banks can charge anywhere from 8 percent to 17 percent more for credit card rates, depending on your credit score and the 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 Treasury bills, notes, and bonds 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. 

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 Treasurys. Interest rates on long-term loans rise along with those yields. The same holds true for student loans. Mortgage interest rates have a tight relationship to Treasury note yields.

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. That's true for all other types of bonds.

Standard & Poor's rate the risk of default. Bonds with the most risk, called high-yield bonds, pay the most return. When Treasury yields rise, so do these bonds to remain competitive.