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When Will The Fed Increases End And The Interest
Rates Level Off? The
year: 1981. President Ronald Reagan fired the striking air traffic
controllers. Sandra Day O'Connor became the first female Justice of the
Supreme Court. Prince Charles and Princess Diana were married. MTV went
on the air.
And
what was the average interest rate in 1981?
A
stunning 14 percent.
Comparatively,
the recent hikes in the prime rate by the Federal Reserve seem quite
small. Although the Fed has raised the Federal Fund rate (which is
closely tied to the long-term mortgage rate) repeatedly since June of
2004, the current interest rate of slightly over 6 percent is still
within range of historical lows. But the recent change in rates has many
prospective homebuyers worried about when the hikes will end.
Fortunately, according the experts, not only are we near the end of
the interest rate increases, but the rates will level off fairly close
to the mark we’re at now.
To
better understand the future of interest rates, it’s helpful to look
at the reasons why the Fed has been raising the rates. First, the Fed is
somewhat concerned with the speculation of rising inflation in the near
future. By raising the short-term rate, the Fed hopes to contain rising
prices in different sectors of the economy. Although inflation is
relatively contained as of now, the Fed is worried about inflation in
2006. Second, the Fed may be trying to help deflate the so-called
housing bubble. With slowly rising rates, the real estate market is
seeing more of a gradual slowdown rather than imploding due to spiraling
home prices.
As
for the prevailing predictions, most experts believe the Fed will halt
its “measured” rate hikes in the second half of 2006 and the
long-term interest rate will top off at around 6.5 to 6.7
percent—which isn’t much higher than it is now. The National
Association of Realtors, a leading authority on the real estate market,
predicts the interest rate will reach 6.7 percent at the end of 2006,
but will go no higher. Some economists theorize that a leveling off of
home prices will help slow economic growth which will in turn lead the
Fed to stop the increases sooner than then it expects. In general, the
consensus is that we will have two or three more rate increases before
the rates level off.
Although
the interest rate hikes do have some people worried, the reality is that
the end is within sight and the largest increases have already taken
place. And since the rates are still at an affordable level as compared
to the double-digit rates of the past, getting a solid deal on a
mortgage—at a low rate—is still a viable opportunity.
∆
Sources:
U.S.
Federal Reserve, National Association of Realtors, Reuters.
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