Economic growth to taper after strong Q2, economist predicts: What it could mean for interest rates

As the economy shows signs of slowing down, interest rates are holding at record lows. Here's what it could mean for future rates. (iStock)

The strong economic growth seen in the second quarter of 2021 could be slowing down as concerns over the COVID-19 Delta variant rise. New data is indicating a slower job market and estimates a decreasing growth rate.

"The good news is that the August inflation report was on target with what was expected," said Dawit Kebede, Credit Union National Association (CUNA) senior economist. "The slight monthly price increase of 0.3% is close to the pre-pandemic average but the annual rate remains high compared to last year."

The Consumer Price Index increased 0.3% month-over-month in August, and was up 5.3% from the year before, according to the Bureau of Labor Statistics (BLS). If you are struggling to make payments, consider taking out a personal loan to lower monthly expenses or pay down high-interest debt. Visit Credible to find your personalized rate today and see how much you can save.

Job market slows

One signal that economic activity is slowing amid the rise in coronavirus cases is the employment market. In August, the employment report disappointed expectations when it added just 235,000 jobs. This came after two months of solid growth – 1.1 million jobs added in July and 962,000 in June.

"There are indications that the strong economic growth we saw in the second quarter is slowing down," Kebede said. "We know this because of the decline in the consumer sentiment index amid concerns of the Delta variant and a slower job market."

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What slow growth means for interest rates

As economic growth slows down, it could signal that interest rates will remain lingering at record lows, economists say. Mortgage rates are in a holding pattern; the current average 30-year fixed-rate mortgage is 2.86%, according to the latest Freddie Mac data.

"It’s Groundhog Day for mortgage rates, as they have remained virtually flat for over two months," Freddie Mac Chief Economist Sam Khater said. "The holding pattern in rates reflects the markets’ view that the prospects for the economy have dimmed somewhat due to the rebound in new COVID cases.

"While our collective attention is on the pandemic, fundamental changes in the economy are occurring, such as increased migration, the extended continuation of remote work, increased use of automation and the focus on a more energy-efficient and resilient economy," he said. "These factors will likely lead to significant investment and new post-pandemic economic models that will spur economic growth."

And when economic growth slows as the virus spreads, it could cause the Treasury Department to slow its plans to raise rates.

"The Federal Reserve will probably delay slowing its purchase of Treasury and mortgage-backed securities despite slight indications that the price increase in durable goods is transitory, as illustrated by the reduction in used car prices," Kebede said. "This is because we are far from maximum employment."

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