AgentMarkets & Economy

Why interest rates are going to rise

The short answer: inflation
  • For two years, mortgage interest rates have confounded the experts -- falling to new lows despite predictions they would rise. Top economists still expect rates to reach or exceed 4 percent by the year’s end and soar to 4.5 percent or even higher in 2017.
  • The reason? This year, inflation has become an important factor in the Federal Reserve's decision-making as the Consumer Price Index approaches the Fed’s trigger of 2 percent a year.
  • Oil prices are the greatest contributor -- rising from a low of $25 per barrel in mid-January to $40 per barrel in April. Expect the Fed to resume raising rates at a moderate pace that will increase as the economy strengthens.

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Why are leading housing economists such as Sean Becketti of Freddie Mac, Mike Fratantoni of the Mortgage Bankers Association and National Association of Realtors' Lawrence Yun still worried about rates in the long term? Although Becketti has lowered estimates to 3.9 percent by the end of this year, he still expects rates on a 30-year fixed to hit 4.5 percent in 2017. Fratantoni sees rates reaching 4.8 percent in the fourth quarter of next year. Yun is also forecasting mortgage rates to end this year at 3.9 percent -- about where they were at the end of last year -- but will rise to 4.6 percent in 2017. Many events, including international financial instability and domestic mortgage demand, contribute to changes in mortgage rates. The most important factor is the Federal Funds Rate, set by the Federal Reserve’s Open Market Committee at its six meetings a year. Even after the Federal Reserve raised rates last December for the first time since 2006, instead of rising, rates on...