Daily Money Tip: What interest rates will likely do in 2014

Posted: January 08, 2014

As the "polar vortex" spins down from the Arctic, stay indoors and ponder where interest rates are headed in 2014 - both as an investor and consumer.

Mortgage rates? Probably 5 percent by year's end. Auto loans? Unchanged at 4.25 percent for new cars, 4.75 percent for used. The 10-year Treasury? Probably 3.5 percent to 4 percent by the second half.

So says Greg McBride, senior financial analyst at Bankrate.com, in North Palm Beach, Fla. (And yeah, we are envious, Greg.)

Provided America's tepid economic recovery continues apace, McBride projects that "the Federal Reserve will keep dialing down its bond purchases through the rest of this year."

What will the Fed, under the direction of new chair Janet Yellen, do after that?

"Given Yellen's dovish bias, we can certainly expect supportive monetary policy for the duration of 2014," said Jason Pride, director of investment strategy for Glenmede in Philadelphia, in a recent note to clients of the trust company.

That means Yellen is expected to keep short-term interest rates low. ("Dovish" means she's not worried about inflation; "hawkish" means the opposite.)

Low short-term rates plus Fed stimulus might be good for the markets, but it hurts savers.

Sadly, for savings accounts,

2014 promises continued measly interest rates on money market funds and short-term bank CDs (certificates of deposit), McBride added. "It's going to be another tough year for savers."

The Fed is, instead, focused on "deflation," and McBride did us a favor by explaining the definition.

"Inflation is when prices rise, the analogy being that the car moves forward," he said. "Disinflation means prices rise, but more slowly, or the car slows down. With deflation, prices fall. . . . The car moves in reverse."

Unlike the Fed, McBride is more concerned about long-term inflation because of the various stimulus programs by central banks around the globe. Along with dividend-paying equities, he also invests in REITs (real estate investment trusts), TIPS (Treasury inflation-protected securities) and even some precious metals, in smaller proportion as part of a diversified asset allocation.

McBride likens it to coverage on your home: "They're an insurance policy on your portfolio."



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