Which Direction are Interest Rates Headed?

Recently we have seen rates on certificates of deposit, savings accounts and home loans go down. This is partly the result of the government trying to un-freeze the credit markets by lowering rates. The Federal Reserve has been actively driving down interest rates to help the economy. Last week, the Federal Open Market Committee (FMOC) decided to keep the Fed Funds rate at a target range of 0% to .25% for some time, saying, "The Committee continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time."

The U.S Treasury Department has been dolling out billions of dollars to banks large and small since the Troubled Asset Relief Program (TARP) started late last year.As a result, banks have used this money to fund their reserves instead of competing with each other for depositors funds by raising deposit rates or by offering promotional CDs and savings accounts. In November 2008, you could find several banks offering 5 year CD rates of 5.00% and over, now most offer 5 year CD rates in the 3.00% to 4.00% range.

The Fed has also been printing tons of money and buying large quantities of agency debt and mortgage backed securities to drive mortgage rates down. When the Fed announced they would purchase $500 billion in mortgage-backed securities, rates on home loans immediately dropped 1.00%.

So where are rates headed?

Rates on deposits and home loans should stay low for awhile, at least until the economy starts recovering sometime later this year. All this money being printed and pumped into the economy, the record low interest rates and the pent up demand by consumers on purchases should lead to higher rates in the future. It may also lead to much higher rates if the economic pendulum swings too far in the opposite direction. The way the economy is now, we would all love to be on the other side of the pendulum.

Today's guest post is by Brian McKay of Monitorbankrates.com.