COVID-19

Will borrowing get more expensive for consumers as the economy recovers?

Amy Scott Mar 5, 2021
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This week, Freddie Mac said the average interest rate for a 30-year fixed-rate mortgage climbed above 3% for the first time since July. phototechno via Getty Images
COVID-19

Will borrowing get more expensive for consumers as the economy recovers?

Amy Scott Mar 5, 2021
Heard on:
This week, Freddie Mac said the average interest rate for a 30-year fixed-rate mortgage climbed above 3% for the first time since July. phototechno via Getty Images
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Expectations of higher inflation as the economy rebounds have investors demanding higher yields to compensate. In turn, the recent surge in bond yields is pushing up the interest rates consumers pay on mortgages and other loans.

How might that affect consumer spending?

This week, Freddie Mac said the average interest rate for a 30-year fixed-rate mortgage climbed above 3% for the first time since July.

Economist Scott Hoyt with Moody’s Analytics said rising rates could dampen demand for housing a little and refinancing a little more.

“Although they’re still remarkably low by historic standards, so we need to keep that in perspective,” Hoyt said.

Other kinds of consumer spending are less likely to be affected. Interest on auto loans and credit cards are pegged to shorter-term rates, which haven’t been rising as much. And Gad Levanon, who leads the Labor Market Institute at the Conference Board, said consumers aren’t as sensitive to changes in those rates.

“Outside of housing, I think the impact of the increase in interest rates on consumption will be very limited and almost insignificant compared to the other developments,” Levanon said.

Those other developments include the reopening of the economy as more people get vaccinated and the $1.9 trillion COVID-19 relief bill Congress is hammering out.

That, combined with very strong savings that many consumers accumulated in the past year, “it’s a a perfect recipe for a boom in consumer spending,” Levanon said. “They have stuff to spend on; they have the money and the willingness to spend on it.”

It’s anyone’s guess whether interest rates on mortgages and other loans will continue to rise. The Fed has been helping keep long-term rates low by purchasing Treasurys and mortgage-backed bonds.

Sarah Foster with Bankrate said that’s not likely to change anytime soon.

“Chair [Jerome] Powell, so far, has really not indicated at all that he’s concerned,” Foster said. “In fact, he really sees this pickup in yields more as a statement of confidence in the economy.”

And if rising interest rates do become a concern, she said, the Fed still has tools to step in.

COVID-19 Economy FAQs

What do I need to know about tax season this year?

Glad you asked! We have a whole separate FAQ section on that. Some quick hits: The deadline has been extended from April 15 to May 17 for individuals. Also, millions of people received unemployment benefits in 2020 — up to $10,200 of which will now be tax-free for those with an adjusted gross income of less than $150,000. And, for those who filed before the American Rescue Plan passed, simply put, you do not need to file an amended return at the moment. Find answers to the rest of your questions here.

How long will it be until the economy is back to normal?

It feels like things are getting better, more and more people getting vaccinated, more businesses opening, but we’re not entirely out of the woods. To illustrate: two recent pieces of news from the Centers for Disease Control. Item 1: The CDC is extending its tenant eviction moratorium to June 30. Item 2: The cruise industry didn’t get what it wanted — restrictions on sailing from U.S. ports will stay in place until November. Very different issues with different stakes, but both point to the fact that the CDC thinks we still have a ways to go before the pandemic is over, according to Dr. Philip Landrigan, who used to work at the CDC and now teaches at Boston College.

How are those COVID relief payments affecting consumers?

Payments started going out within days of President Joe Biden signing the American Rescue Plan, and that’s been a big shot in the arm for consumers, said John Leer at Morning Consult, which polls Americans every day. “Consumer confidence is really on a tear. They are growing more confident at a faster rate than they have following the prior two stimulus packages.” Leer said this time around the checks are bigger and they’re getting out faster. Now, rising confidence is likely to spark more consumer spending. But Lisa Rowan at Forbes Advisor said it’s not clear how much or how fast.

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