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How High Will Interest Rates Go? Fed Hikes Could Extend Through 2021: Analyst

The U.S. Federal Reserve is about to raise short-term interest rates once again today, likely bumping up a quarter percent from its current 2.0 percent rate. But the Fed is also expected to express signs of a strong U.S. economy, which could hint at more increases in the future than previously suggested.

Since rising Fed rates impact consumers, with higher interest rates on adjustable loans including mortgages and credit cards, and higher savings rates on short-term deposits, there’s plenty of interest about the Fed’s action today and signals for the future.

How high will interest rates go? See a live stream of the Fed's press conference today at 2:30 p.m. below.

There’s little debate they are heading higher throughout 2018, and perhaps into 2019 and 2020. The Fed had pulled rates back to 0.25—essentially a flat rate—and kept them there for seven years as recession stimulation. Now, with economic growth and a stabilized economy, the Fed is working to get back to the neutral ground or higher on interest rates. The Fed has already hinted at four hikes this year—with today’s being expected as one of those quarterly upticks. The biggest question is where they will go after that.

“Rates are only going to go up,” says Nick Clements, co-founder of MagnifyMoney, a personal finance website, according to USA Today. “That means life is going to get more expensive for debtors, and more rewarding for savers. If you are in debt, now is the time to lock in the lowest rate possible.”

Mark Cabana, head of U.S. short rate strategy at Bank of America Merrill Lynch, said he expects the Fed to increase economic growth forecasts for the U.S. economy today, perhaps signaling that rate hikes could extend into 2021. The U.S. economic data is showing strong job numbers, a low unemployment rate, growth, and high consumer confidence.

"It's just a fact the data in the U.S. continues to be strong. Some of the worst fears over trade were not realized," he said.

Cabana told CNBC he expects the Fed will keep its forecast of four hikes for this year, three for 2019, one in 2020, add about a half a hike in 2021 as part of a possible new forecast—ultimately bringing the Fed funds rate to 3.50 percent.

Already, the Fed has hinted at four interest-rate hikes in 2018, and today's would be the third of those four. The stock markets have already priced in these hikes, experts said. It's more about what the Fed signals about the economy and where it will go beyond 2018.

"The Fed has some catching up to do,” wrote Jan Hatzius, the chief economist at Goldman Sachs, according to The New York Times. 

In other words, Hatzius believes the economy has expanded beyond the Fed's low rates, forcing them to do more. But there's debate about how high is too high for the Fed funds rate. President Donald Trump has publicly stated he thinks too many rates increases from here will slow the U.S. economy, finally percolating after years of slow growth.

Robert Kaplan, Dallas Fed president, said in a CNBC interview three months ago that he thinks central bank should certainly raise rates to “neutral,” a number he defined as between 2.5 percent and 2.75 percent.

“Once we get in the mid-2s, I think the going gets a lot tougher, We have to be very, very careful,” Kaplan said.

Consider that four quarter-point hikes in 2018 likely would increase the monthly payment on a $200,000 mortgage by $84 to $112, according to MagnifyMoney.

Car loan rates could rise, and so will bank prime loans tied to short-term lending rates. Rates banks pay on certificates of deposit will also increase, helping consumers, but recent studies have shown that savings rates have been declining.

"Rising rates are going to be good news for savers and bad news for borrowers," Bankrate's McBride said, according to NPR. "Do what you can to put yourself on the right side of that equation."

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