Strengthening economy raises hopes for higher rates

December 12, 2013

| MoneyRates.com Senior Financial Analyst, CFA

Within the first 10 days of December, three things happened that could set the stage for higher interest rates in 2014.

As things have stood for the past five years, the level of interest rates has been highly dependent on the strength of the economy. Early December brought three signs that 2014 may be a better year for growth, and thus one that could bring higher interest rates.

1. GDP was revised significantly upward

On December 5, the Bureau of Economic Analysis' second estimate of Gross Domestic Product (GDP) for the third quarter indicated that the economy grew at a rate of 3.6 percent. That's a significant improvement from the 2.8 percent originally estimated, and an even greater improvement over the 2.5 percent growth rate of the second quarter. The only discouraging note: A significant portion of the third quarter's growth came from inventory increases rather than final product sales. Inventory increases go through periodic cycles, but if final sales continue to lag behind, it will be a bad sign for the economy.

2. Employment growth had another strong month

While the GDP figures looked back a couple months to the third quarter, the employment figures released on December 6 by the Bureau of Labor Statistics showed more a more recent sign of strength in the economy. Net employment growth in the United States was 203,000 jobs in November -- the second consecutive month with job growth of 200,000 or better and an improvement over the average of 195,000 new jobs per month over the prior year.

3. A tentative budget deal was reached

Republican Paul Ryan and Democrat Patty Murray, lead Congressional budget negotiators for their respective sides, announced a tentative agreement to approve a budget that would give the country a break from the series of short-term fiscal standoffs of recent years. The deal is limited in that it does not address the country's long-term fiscal problems, but at a time when the economy seems to be gathering momentum, preventing another government crisis from getting in the way may be very helpful.

Your attitude toward these developments may vary greatly, depending on whether you have a large amount of money in savings accounts and other deposits, or if you intend on buying a house next year. With interest rates on savings accounts mired near zero, any hint of higher rates is welcome news. From a home buyer's perspective though, current mortgage rates are already more than a full percentage point higher than they were a year ago, so any further increase might further affect your plans.

Of course, this situation is a bit of role reversal. For the last five years, borrowers have benefited from record low rates, while savers have been hurt by them. If savers finally get the better of things in 2014, you can hardly say they weren't due for it.

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