Why have long-term interest rates jumped?

Date posted: January 13, 2011

After falling to generation lows, long-term interest rates, such as on fixed rate mortgages, have surged higher recently. Some of the rates are up almost three quarters of a percentage point. Why is this happening? N.C. State University economist Mike Walden responds.

“This has really been a big surprise to many financial analysts, because you may remember the Federal Reserve a few months ago announced they were going to print a bunch more money and they were going to inject that money into the economic system and they were going to try, among other things, to push interest rates down as a result of that. Instead, interest rates have gone up, and analysts think there are three potential answers as to why.

“One is that we did have a big drop in interest rates earlier this year. The drop may have overshot the low value, and we are simply now recovering to what would be a more normal value. That would be one answer.

“The second answer is that all this printing of money expected by the Federal Reserve is bringing up fears of higher inflation down the road, and that is being reflected in higher interest rates.

“The third one is that the financial markets are a little more optimistic about the future economy, thinking it will grow more than we had expected. If that happens there will be more demand for loans, which will push up interest rates.

“So out of those three you would actually say one is good — the growth one — but two of them — the overshooting and the inflation — are bad, and we will just have to wait and see which one is right.”

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