Little Change Expected in Interest Rates in 2011

Judging from 2010, interest rates for the coming year probably won’t change much, says Dr. Robert Reed, associate professor of economics at The University of Alabama’s Culverhouse College of Commerce.

In the first quarter of 2010, 10-year yields stood at around 3.75 percent, Reed notes. “However, job growth during the summer failed to impress and the nation’s unemployment rate did not fall below 9.5 percent. Moreover, concerns about the sovereign debt crisis in Europe cast a shadow over confidence about economic conditions across the globe. In fact, recent rates are 100 basis points, a full percentage point, lower than at the beginning of the year, Reed says. “Interest rates in 2011 are also likely to remain low.”

Reed says that while the recession has ended, there was increased concern about the slow pace of recovery. “Job growth was slow, the housing sector continued to drag, and prices signaled the possibility of deflation risk.”

Consequently, the Federal Reserve announced a second round of corrective measures, and in anticipation, 10-year yields declined from mid-September until mid-November.

“In the past few weeks, interest rates have risen somewhat,” Reed says. “In the coming year, rates are likely to remain low, but the recent elections and the proposition of tax cuts have generated increased awareness that the government’s budget deficit will grow. As the federal government will need to raise additional funds, it will need to issue more debt. Consequently, increased deficit financing will put upward pressure on rates.”

Reed says that while the actions of the Federal Reserve should promote lower interest rates, the actions of Congress and the White House may work in the opposite direction and the result will be little change.