Where Will Interest Rates Go in 2018 ?

interest rate graph on tablet

The Federal Reserve raised interest rates three times throughout 2017 with the current benchmark rate between 1.25 and 1.50 percent. The sharp uptick in bond yields towards the end of December could be a harbinger of things to come and investors are gearing up for a possibly volatile year.

The yield on the 10-year treasury is currently around 2.50 percent – a large gain from where it stood just a few weeks ago when it was in the 2.30 percent range. The threat of a larger deficit and expanding economy means rates may have only just begun to rise. As we head into the new year, the big question that looms is what actions will the Fed take and where will interest rates end up?

Interest rates and the economy

There’s some disagreement about how interest rates actually impact the stock market. Typically, a higher interest rate translates to lower stock prices because companies pay more for loans and operations financing, thus negatively impacting earnings.

But in practice, it seems higher interest rates don’t have a long term impact on markets in either direction. There may be some short term fluctuations, but overall companies and the economy as a whole is able to absorb the affect higher interest rates have on business. Already it looks like higher interest rates haven’t hurt stock prices. Last year, we saw interest rates jump three times, yet the markets continued to hit new highs on a regular basis.

For 2018, the Fed should continue raising short term rates due to a tightening labor market and rising inflation. As of November, the inflation rate stood at 2.2 percent and looked to be heading higher. The Fed will want to stay ahead of inflation and will likely keep raising rates to keep inflation in check.

The Fed is continuing to pull back bond purchases as well, bringing the total to $20 billion less per month. As it stands, there’s estimated to be $1 trillion less liquidity for 2018. Overall, analysts expect to see at least three more rate hikes before the end of the year.

By the end of 2018, investors can expect to see the yield on the 10-year treasury at 3 percent or even higher. For the foreseeable future, though, short term rates will outpace long term rates. Eventually, the long term rates will rise as well, but it will take a few quarters before investors start seeing that happen.

The Fed has been one of the biggest movers in the market over the past several years, with actions like quantitative easing influencing the markets. With the Fed taking the reigns, investors will likely base trading decisions off of what the Fed says. Markets are headed toward more volatile trading this year, but savvy investors should be able to profit from it.