How high will interest rates go?

Currently interest rates are the highest they’ve been in years. 30-year mortgages are pushing 7%, and car loans are in the 6-7% range. This occurred because the Federal Reserve has been raising interest rates as a way to combat inflation. When the Fed raises rates, goods become more expensive for borrowers. With less money for people to spend, prices and inflation tend to go down. Raising interest rates is a necessary evil in the fight against inflation.

While bad for borrowers, higher interest rates are good news for savers. After over a decade of record low interest rates, savers are seeing higher returns on their money with CDs, online savings accounts, and treasury bonds yielding between 4-5%.

Back to your question - how high will they go? The short answer is that it depends, but we’re close to the top. As of today, the Fed Funds Rate is 4.56%. Last month many assumed there would be another hike of 25 basis points, or 0.25%, as long as inflation continued to drop. Unfortunately we’ve received bad news on inflation since then, as January inflation rose a surprising 0.5% over the prior month. This implies the Fed will need to raise rates at least another 50 basis points (0.50%), or perhaps 75. Ultimately any forecast depends on the next round of inflation data, especially the February inflation reading. Higher inflation will mean higher rates, and lower inflation will mark the beginning of the end of rate hikes.

If you have adjustable rate debt such as credit cards or home equity lines of credit, pay off as much as you can. Delay any purchases requiring new debt such as auto loans or mortgages. In the meantime, save your money as safe investments such as Treasury bills, CDs, and bank savings are offering generous yields. I suspect rates will be in a better place a year from now, and on their way down to a more reasonable level. Not as low as we saw the past decade, but more reasonable than where they are today.