federal reserve

Interest rate review and preview

Wednesday Jan. 6, 2010
Posted 11 a.m. Eastern

Let's start off the new year with a look at where rates for some consumer banking products went in 2009 and the outlook for 2010.

Mortgage rates finished the year where they started, with the average 30-year fixed rate at 5.33 percent. But much of the year was spent in record low territory, getting as low as 5 percent in November before marching upward throughout December in what is likely a sneak preview of what is to come in 2010.

With the Federal Reserve's mortgage bond purchases winding down, the government issuing boatloads of debt, and inflation worries percolating among some investors (but not the Fed!), the risk for mortgage rates is to the upside. The 6 percent level is certainly within striking distance by the end of the first quarter and we could move close to 6.5 percent during the year if the economy continues to improve. This will take some buying power away from home shoppers but not enough to price too many otherwise well-qualified borrowers out of the market. If you can't afford the house with a 6 percent mortgage rate, you can't afford the house!

But rising mortgage rates will be more problematic for borrowers looking to refinance. Not only does a higher rate potentially wipe out the benefit of refinancing from one fixed rate to another, but the government's Home Affordable Refinancing Program, or HARP, is set to expire in June. Even if extended, there is no guarantee mortgage rates won't be higher by midyear so now is the time to act.

To be fair, mortgage rates could certainly fall even further than what we saw in 2009 but the catalysts for such a move fall squarely into the "careful what you wish for" camp. An economic stumble, another global financial or geopolitical event that makes safe haven investments appealing, or a bout of deflation, are but a few.

Credit card rates jumped -- on average -- more than one full percentage point in 2009, from a low of 10.63 percent to 11.77 percent by year-end, despite no interest rate action from the Federal Reserve. Unfortunately, there is more to come. Until Feb. 22, when the majority of the Credit Card Accountability, Responsibility and Disclosure, or CARD, Act provisions go into effect, issuers will continue to raise rates on cardholders' existing balances. The credit card environment for the foreseeable future is one where new credit lines will be stingier and rates will be higher than what we've become accustomed to in recent years. And once the Federal Reserve does start to boost short-term interest rates -- whenever that may be -- it will usher in still higher rates on variable credit cards. The moral of this story is that credit card rates will only go higher this year and next, so pay down that debt as aggressively as you can.

Will 2010 be any better for savers? Well, it can't be much worse. The average one-year CD yield fell from 1.79 percent to 0.82 percent in 2009, but don't expect any substantive improvement until the Fed begins boosting short-term interest rates. Unfortunately for savers, that is unlikely any time soon. Yields on longer maturities, such as three-year, four-year, and five-year CDs, will be first to perk up but these have a long way to go before becoming appealing.


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