With 2013 officially behind us, many people have begun to wonder what they should expect in the new year and where 2014 interest rates may go.
Source: Flickr / 401(K) 2013
Interest rates are a curious thing. Low interest rates benefit corporations seeking debt financing and consumers who are buying homes.
But high interest rates benefit savers and those banks and other financial institutions that actually issue those loans to consumers and corporations.
2013 saw interest rates rise across the board as mortgage rates, bond rates, and much more began pacing upward from historic lows.
Consider the rate paid on 10-year U.S. government bonds, which rose from 1.8% at the end of 2012, to stand at 3% during the last week of 2013:
Source: St. Louis Federal Reserve.
It is easy to see what has happened in the past, but predicting the future is always a touch harder. However, a few experts have shared their opinions on where they expect interests rates to go in 2014 and beyond.
Expert opinion
Bob Doll, the noted chief equity strategist at Nuveen Asset Management, who formerly held the same position at BlackRock, said in his 2014 Ten Predictions report that he expected "10-year Treasury yields [to] move toward 3.5% as the Fed completes tapering."
On the subject of the Federal Reserve, although it does not release projected interest rates, it did note that two of its members targeted the Federal Funds Rate -- which is the interest rate banks charge each other -- to be above the 0%-0.25% range it currently sits at by the end of the year. One of the members on the Federal Open Market Committee even set the target interest rate range above 1% by the end of 2014. When you consider that it stood at 0.07% yesterday, this would mean a remarkable rise in rates.
The economists at Wells Fargo are a little less bullish than Doll, as they note in their 2014 Economic Outlook that they anticipate the 10-year Treasury rate will stand at 3.2%. However, this too is above where current rates sit. And the economists note their rationale is that they "expect long-term rates to exhibit an upward bias as Fed tapering moves forward. However, the extent of any increase in long-term rates should be modest, given continued low inflation and a reduced federal budget deficit."
Meanwhile, the economic team at PNC noted in its most recent National Economic Outlook that the 10-year Treasury Note will stand at 3.47% when 2014 draws to an end. It too highlighted the Federal Reserve's decision to begin the tapering process -- the slow reduction in its bond purchases -- noting that move "is putting upward pressure on long-term interest rates, including mortgage rates."
The Foolish Bottom Line
These are just three samplings of opinions of countless economists out there, but the reality is, almost everyone is projecting that interest rates will rise in 2014 and beyond. While these rates would be well above levels seen coming out of the most recent recession, they are still well below historic levels:
Source: St. Louis Federal Reserve.
As previously mentioned, there are things both good and bad about higher interest rates, but if rates continue to move upward in 2014, it likely means our economy is moving in the right direction, too.
