Interest Rates Might Higher Move Sooner Than the End of 2015

Until recently, we have all been going on the assumption that rates on interest bearing assets won’t move higher until the end of 2015. This assumption is based on the Federal Open Market Committee’s policy of keeping the federal funds rate in a targeted range of zero percent to one quarter percent until that time.

That notion changed this past week because in the FOMC’s most recent policy statement, they said they plan to keep the fed funds rate that low only until unemployment rate falls below 6.5 percent. While they believe the rate will stay above 6.5 percent until the end of 2015, it can quite possibly fall below 6.5 percent before then.

George Soros, the chairman of Soros Fund Management and a legendary investor, believes interest rates will jump considerably higher this year. In an interview with CNBC at the World Economic Forum in Davos, Switzerland, Soros said he believes interest rates are moving higher “as soon as there’s clear signs of pick up in the economy.”

He went on to say “It may already have begun, actually. It shows some signs. And I think it’s most likely to happen this year, once you are past the uncertainty about the budget the– and investment decisions are made– I think you’ll see it.” You can read the entire interview transcript here: George Soros/CNBC Interview.

Higher interest rates bodes well for holders of interest-bearing assets as they have been suffering with low rates for many years now. CD rates, savings account rates, money market rates, bond yields and all other rates have been low since the most recent recession.

A sharp increase in rates in the short term could have a detrimental effect on the economy and force a slow in growth which would send interest rates lower once again. While we welcome higher rates, we’d rather see a gradual increase in rates so the cycle of higher rates lasts longer.

 
Author: Brian McKay
February 7th, 2013