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Economic Forecasts

The Fed Forges Ahead

Kiplinger's latest forecast on interest rates


GDP 2.1% pace in '17, 2.4% in '18 More »
Jobs Hiring pace should slow to 175K/month by end '17 More »
Interest rates 10-year T-notes at 2.4% by end '17 More »
Inflation 2.0% in '18, up from 1.4% in '17 More »
Business spending Rising 3%-4% in '17, after flat '16 More »
Energy Crude trading from $40 to $45 per barrel in December More »
Housing Existing-home sales up 3.5% in '17 More »
Retail sales Growing 3.5% in '17 (excluding gas) More »
Trade deficit Widening 4% in '17, after nearly flat '16 More »

The Fed will buy fewer Treasury and mortgage-backed securities, beginning in October, and will likely raise rates a quarter-point in December. The Fed sees inflation running close enough to its 2 percent target to forge ahead with its rate and balance sheet normalization program. The central bank will first cut security purchases modestly before gradually cutting more, so that interest rates won’t really feel the cuts’ effect until next September or so.

Long-term interest rates should rise a little by year’s end, but inflation’s flatness combined with ongoing economic and fiscal policy uncertainty should keep those rates from increasing much. Bond market investors see tepid inflation because of flat crude oil prices, as well as subsiding price pressure on new and used cars, doctor’s visits, food and clothing. Investors also believe that any bump to economic growth from government fiscal policies will be delayed.

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The Fed, on the other hand, sees low inflation as temporary and is focused on the falling unemployment rate and other indicators that show a tightening labor market. The Fed very much wants to stay ahead of any inflation that rising wages may generate, and will probably lift short-term rates by a quarter of a percentage point once more in 2017, likely at its December 13 meeting. It is also expected to raise rates at least twice in 2018.

We think today’s 2.25% yield on the 10-year Treasury note will hit 2.4% by the end of 2017. The bank prime rate that auto loans and home equity loans are based on will bump up to 4.5%, from 4.25%.


By year-end, expect the average 30-year fixed-rate mortgage to rise to 3.9% from 3.8%, with 15-year fixed rates reaching 3.2% versus 3.1% now.

In 2018, look for the effects of the Fed’s short-term rate hikes and securities-purchase reductions to boost long rates by another 0.4 percentage points. The 10-year Treasury note rate should be 2.8% and the 30-year fixed mortgage rate, 4.3%. The short-term bank prime rate will be 5.0%.

Source: Federal Reserve, Open Market Committee

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