Life will probably get more expensive for borrowers in 2018.

Interest rates on mortgages, credit cards and personal loans will continue to slowly rise in 2018, as the economy moves on from the 2007-09 recession and the Federal Reserve implements more normal policies.

“2018 will be another year with an active Federal Reserve,” said Greg McBride, Bankrate’s chief financial analyst, “and one that will see inflation pick up but stay near 2 percent, a further flattening of the yield curve, faster but uneven economic growth, and an overdue stock market correction — though the actual cause of the correction will be anyone’s guess.”

Let’s start with the Fed. The U.S. central bank raised short-term interest rates three times in 2017, in part because of low unemployment figures and decent growth in gross domestic product.

Expect that trend to continue. Next year should see three more 0.25 percentage-point rate increases, according to experts surveyed by Bankrate, even as new Fed Chairman Jerome Powell takes over for Janet Yellen.

Inflation could be one potential snag. Despite a low unemployment rate, wage growth remains anemic, limiting how fast prices are growing. That’s the major reason the Fed’s preferred inflation gauge has been so underwhelming recently. Should inflation continue to be so low, 2018 could look more like 2016, in which the Fed raised its rates only once.

Since interest rates on consumer products, such as personal loans and credit cards, are influenced by the federal funds rate, borrowers will be out more money next year. For that reason, it’s important to pay down debt in this rising rate environment.

Mortgages will hopefully have a more tranquil year. Mortgage interest rates, which are based on the 10-year Treasury yield, jumped after Donald Trump’s surprise election victory because market participants expected deficit spending in the form of infrastructure investment and tax cuts. As the year muddled on, expectations petered out.

Nevertheless, the 30-year fixed mortgage rate has inched up since September as the Republicans began to make progress on their tax bill, which Trump recently signed, and investors shunned bonds for stocks.

“Mortgage rates follow bond yields, and forecasting a volatile year on the long end of the yield curve implies the same for mortgage rates,” McBride said. “Expect mortgage rates to dip below 4 percent, perhaps more than once during the year, and a spike above 4.5 percent before settling around 4.5 percent to close out the year.”

Savers, though, should benefit. Look for CD and savings account yields to inch upward as the nation gears up for another political fight in November 2018.

“2018 will be a year where we see more widespread, and consistent, improvement on returns for savings and especially CDs,” McBride said. “However, just as in 2017, the magnitude will again differ greatly. The national averages will reflect a more modest increase than the top-yielding, nationally available accounts that are amidst an arms race, and where the improvement is far more evident.”

McBride predicted that, at the end of 2018, the average one-year CD yield will be 0.7 percent and the average five-year CD yield will be 1.5 percent.

Regardless of the political environment, you’re generally better off paying down debt and building up your emergency fund.

1
0
0
0
0