How low can interest rates go?
Mortgage rates continue to plummet to incredible lows, with the benchmark 30-year fixed rate mortgage dropping to 5.21 percent for the week ending June 20, 2003, according Freddie Mac’s Primary Mortgage Market Survey. The average interest rate for the 15-year FRM was 4.62 percent.
Experts agree rates likely will slide lower than current 40-year lows before they bottom out, but few are convinced U.S. rates will ever fall below 4 percent.
After 12 rounds of cuts, the federal funds rate has dropped from 6.5 percent at the beginning of 2001 to its current average of 1.25 percent. The federal funds rate is also called the overnight rate because it’s what member banks charge one another for overnight loans. Other interest rates, most notably the prime rate, move in lockstep with the overnight rate, which ultimately affects the rates that consumers pay on some credit cards, auto loans and equity loans.
Economists earlier this year assumed that by now the economy would have been growing at a faster pace and the Federal Reserve would’ve raised the key federal funds rate. But at press time, there was speculation that the Fed may cut the rate by yet another quarter point at its June 24-25 meeting. If the cut is made, it will be the 13th rate cut since the beginning of 2001.
And for how long?
Typically, the Fed cuts short-term rates to stimulate the economy. When rates are low, consumers are more likely to borrow money to buy things. Low rates stimulate businesses from two directions: rising consumer demand on one side, and cheap money on the other. So, low rates encourage businesses to invest in new plants and equipment, further stimulating the economy.
Some homeowners have refinanced multiple times, and many people are driving cars that were bought with zero-percent interest loans. But businesses have stubbornly remained reluctant to hire new employees, buy equipment or build plants. Unemployment continues to be a concern.
The Fed has already sent a not-so-subtle hint that it won’t be in a hurry to raise rates once a more vigorous economic expansion takes hold. Thus, although experts don’t agree, most are predicting that the low rates will remain through most of this year, then slowly climb early next year.
The low rates mean this year undoubtedly will be another one for the record books in the real estate finance industry. The Mortgage Bankers Association of America forecasted $3 trillion in mortgages would be written in 2003, topping last year’s approximate level of $2.5 trillion.
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