Your Money Minute with Dennis Staaland

More 2010 Predictions

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We're looking at what 50 top economists are looking at for 2010.  Last week we looked at GDP.  This week we are going to look at interest rates.

The Federal Reserve Bank has the ability to set or have input into short-term interest rates.  They meet several times per year and set a target for fed funds, which is the rate that banks are paid for their excess cash.   The Federal Reserve targets that rate and also controls the discount rate which is the rate that the fed lends money to banks.

 Long term rates are governed by the market, or essentially, what buyers and sellers of bonds are willing to pay.  This market is similar to the stock market in that it trades on a bid and ask system.  When the economy is heating up, or expanding, higher interest rates are prevalent, which causes the economy to slow down.  The reverse is true when we are in a slow economy, or a recession.  Interest rates go down.  So, if our group of 50 economists think that the economy will improve next year, then interest rates will have to go up!!  Not dramatically, but they should be about 1% higher a year from now.

That means a number of things for the economy:

• 1. First, it means that mortgage rates will be higher than they are now, which will most certainly hurt an already crippled industry.
• 2. Second, it means that struggling businesses will have to pay higher rates for their business loans, and
• 3. Third, consumers will have to pay higher rates for personal loans, like car loans.