Congress and President Obama may have reached a deal to avoid
the fiscal cliff, but the agreement still leaves some key questions
about government finances unanswered. As things stand now, a number
of factors suggest that mortgage rates and interest on savings
accounts could move higher by the end of 2013.
What the deal accomplished
The most prominent aspect of the deal to avoid the fiscal cliff
is that it preserved the Bush-era tax cuts for most Americans --
only individuals making more than $400,000 a year and households
making more than $450,000 a year will see their federal income tax
rates rise. Wealthy Americans will also pay more in capital gains
and estate taxes under the agreement, while more people will be
able to avoid the alternative minimum tax, which means that those
people will be able to take better advantage of tax deductions. The
deal also delayed a round of automatic spending cuts that was due
to go into effect January 1.
The immediate goal of this deal was to avoid snuffing out an
already
fragile economic recovery
. Most experts agreed that the economy was not growing at a strong
enough rate to overcome the drag on growth that result from a
combination of widespread tax increases and federal spending
cuts.
What the deal didn't accomplish
The deal did not completely spare the average taxpayer. A
temporary break on Social Security
taxes
was allowed to expire, meaning that most people will see a small
hit to their paychecks from now on.
Perhaps more significantly in the long run, the deal did little
to address the looming problem that inspired the fiscal cliff in
the first place -- the growing federal budget deficit. The
Congressional Budget Office estimates that the deal will add $4
trillion to the deficit over the next 10 years.
The budget deal also failed to address the country's debt limit,
which sets up another confrontation between Democrats and
Republicans within a couple of months. Between that and the fact
that the fiscal cliff's spending cuts have only been delayed rather
than cancelled, it means that the economy may yet have to withstand
some level of spending cuts.
The impact on interest rates
Because the budget deal leaned more toward economic stimulus
rather than deficit reduction, it could help reverse the trend that
has seen interest rates decline drastically over the past few
years. That's bad news for potential borrowers, but good news for
depositors who have seen
interest on their savings accounts
and other deposits all but disappear.
Anything that stimulates the economy has the potential to
increase the demand for capital, which creates upward pressure on
interest rates. It could also help bring unemployment down, which
would hasten the day when the Federal Reserve can back off on its
current policy of active intervention to lower interest rates. In
addition, because the deal looks like it will add to the deficit
problem, it may raise credit concerns, which would also contribute
to higher interest rates.