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U.S. Long Term Credit Outlook Lowered to Negative: Are Higher Interest Rates on the Way?

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Standard & Poor's (S&P) recently lowered the outlook on the United States' long term credit rating from stable to negative due to policymakers' inability to agree on a long term deficit cutting plan. Some would definitely argue this point but you can thank both Democrats and Republicans in D.C. for the mess we're in.

The U.S. has a credit rating just like individuals do. When a credit rating (or in our case, credit score) is lowered, the debtor pays a higher interest rate on their debt. Since the U.S. has to service the country's debt by borrowing money, it forces interest rates higher for everyone.

Higher interest rates will lead to higher deposit rates and mortgage rates in the coming years. Since the financial crisis and recession we have enjoyed record low rates. This will change not only because the country's credit outlook was downgraded but also because a stronger economy will lead to higher inflation. To keep a lid on inflation, the Federal Reserve will raise interest rates which will in turn force deposit rates and mortgage rates higher.

Strictly speaking from an interest rate perspective, if you're thinking about buying a home and have been on the fence about doing so, you should go ahead and buy before mortgage rates go higher. If you end up paying a higher rate on a mortgage you'll be able to afford less home for your money.

Depositors rejoice! You have suffered a very long time with minuscule CD rates and savings rates. If the economy continues to gather steam and the unemployment rate continues to drop you can expect the Fed to act and raise the Federal Funds Rate and the Discount Rate to keep a lid on inflation.

The Federal Funds Rate is the rate banks use to lend money to each other that is deposited at the Federal Reserve. The Discount Rate is the rate banks pay to borrow money from the Federal Reserve. When these rates go up CD rates and other deposit rates go up as well.
Author: Brian McKay
April 19th, 2011