The Federal Reserve has made no secret of its plan to hold the benchmark Federal Funds Rate at near-zero levels for at least the next few years, but that doesn't mean all interest rates are going to stay low. Mortgages, auto loans, bond yields, and other interest rates that aren't directly correlated to the benchmark could rise significantly in 2021.
In this Jan. 4 Fool Live video clip, Fool.com contributor Matt Frankel, CFP, explains to Industry Focus host Jason Moser why interest rates could rise sooner than most experts are predicting.
Jason Moser: What do you think -- how do you feel like management is kicking around this idea in the boardroom, the current interest rate environment? We talked about this, it seems like forever that interest rates only can go up and yet they continue to go down. Then I know that you and I both took advantage of refinancing.
Matthew Frankel: Yes, the consumer, I love it.
Moser: Yeah, it's just a wonderful environment as a consumer. But obviously, banks would love to see those interest rates start coming back up because that will make it a little bit easier on that bottom line for them. What do you think the chances are that we actually see that rate environment firm up a little bit here in 2021?
Frankel: Well, that's an interesting point because it really has effected -- when I say Wells Fargo (NYSE:WFC) is down 45% this year, it's not just the COVID loss reserves and stuff like that, interest rates are a big part of that. In the third quarter, their net interest income was down 20% year over year. These low interest rates are killing their profits. I think the market is really underestimating the chances of interest rates rising in 2021. I'm not talking about the federal funds rate. The Fed has pretty much said that they're going to keep interest rates low for a while. They want to see a lot of inflation before they even think about raising rates, but it's important for investors to remember that things like mortgage rates and auto loan interest rates, they're not dependent on the federal funds rate. You can have mortgage rates rise without the federal funds rate rising. They tend to move in the same direction over time, but one is not tied to the other. I think as consumer demand starts picking up, as you see the unemployment rates start to normalize, one, you're going to start to see inflation. They think it's going to be really tough to get to that Fed's 2% or 2.5% inflation target. I really don't think it's going to be that tough. All the stimulus they are injecting into the economy. They were talking about doing another round of stimulus after the Biden administration takes over. Consumers want to get out there and spend. Pretty much everybody I've talked to, no matter where they are in the country, are booking vacations for 2021. These are people who don't like to go anywhere normally. People are trying to get out and spend money. I think the market is really underestimating the possibility that we see a significant rise in consumer interest rates in 2021.