Will interest rates rise?

Date posted: March 7, 2011

The cost of borrowing money — the interest rate — is very low today. But economists don’t think it will stay that way, says N.C. State University’s Mike Walden.

“Longer-term interest rates — interest rates, for example, on 10-year loans or above — actually have been turning up recently.

“But beyond that, we don’t think interest rates are going to stay low for a couple of key reasons: Number one, the Federal Reserve — which has a lot of influence over short-term interest rates — has kept those rates very low. In fact, the rate they control, they’ve kept it 0 now going on three years. They are not going to keep it there forever. They are going to have to increase interest rates at some point. I think they are simply waiting until they feel the economy is fully back on track, and I think we are going to see those short-term interest rates go up.

“Secondly, as the world economy improves, and it will and it is, the needs in the world for infrastructure for building road and bridges not just here in the U,S, but around the world, particularly in the emerging countries like China and India, those needs are enormous and that is going to create a large demand for borrowing to finance those infrastructure projects. That is also going to push up interest rates.

“Now higher interest rates aren’t necessarily bad. In fact, from a saver’s point-of-view, saver’s like high interest rates. Ask anyone today if they are happy about interest rates, and the saver’s will say, no, they are getting a very low rate of return for example on their CDs. Also high interest rates can moderate borrowing and also moderate the speculation that often follows from low interest rates.

“But most economists do think that the direction we will see interest rates go in the future will be up.”

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