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Interest Rate Predictions for the New Year
by Joe Taylor Jr.
joe.taylor@californiamortgagerate.com
CMR Columnist
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Winter weather and workplace productivity provide clues for interest rate predictions in the New Year.
While some analysts predict the end of rising interest rates in 2006, more cautious economists say that may not be the case if the Federal Reserve continues to feel pressures of possible inflation. Stock prices rose solidly when the central bank released a statement hinting at a leveling off in 2006 after early, measured rate hikes.
Alan Greenspan's retirement brings some uncertainty as to whether the Fed will actually stop raising interest rates in 2006. Some analysts say that incoming Federal Reserve Chairman Ben Bernanke may continue to raise rates, starting at his first policy-making meeting scheduled for late March.
Some interest rate predictions assume that Bernanke will respond to inflation pressures by raising the prime rate to 4.75 or 5 percent in 2006. Though higher interest rates could frustrate homebuyers, this action would help keep inflation in check. By raising housing prices and making credit cards less attractive, the Fed essentially forces us to save more and spend less.
Though natural disasters and energy disruptions tested Greenspan's ability to control inflation, the American economy continues to grow at a healthy pace. Consumers have even started to enjoy noticeable dividends in savings and money markets accounts for the first time this decade.
The Fed has indicated that it intends to reach a "neutral" interest rate that doesn't stimulate or hamper the economy. However, pressure generated by rapidly increasing energy costs and declining unemployment could push that ceiling higher, resulting in continued rate increases through 2006.
Most analysts agree that the Fed will increase the rate to 4.5 percent in January. Economists believe this adjustment will finally restore normalcy to markets that witnessed artificially low interest rates following the terrorist attacks of 2001. Should the U.S. experience a relatively mild winter or another surge in employment at the beginning of the year, experts predict that the Fed would raise interest rates even higher.
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