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Economic Forecasts

Two More Fed Rate Hikes Likely in 2017

Kiplinger's latest forecast on interest rates

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GDP 2.1% growth in ’17, following 1.6% in ’16 More »
Jobs Hiring pace should slow to 160K/month in '17 More »
Interest rates 10-year T-notes at 3% by end '17 More »
Inflation 2.5% in '17, up from 2.1% in '16 More »
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Energy Crude oil trading from $55 to $60 per barrel in May More »
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Trade deficit Widening 4% in '17, after nearly flat '16 More »

The Federal Reserve’s monetary policy committee raised interest rates by a quarter of a percentage point at its March 15 meeting. The Fed advertised this move well in advance. Chair Janet Yellen had suggested in a speech on March 3 that if jobs and inflation data held up (which they did), then a hike would be appropriate.

The Federal Open Market Committee meeting was significant in that the Fed now appears committed to a path of steady rate hikes. It will probably lift short-term rates by 0.25% two more times in 2017, first at its June 14 meeting and next on either September 20 or December 13.

See Also: All Our Economic Outlooks

The Fed will likely pull back to only one more hike this year if there is any hint that the economy is reacting badly to the March increase. But if the economy keeps growing as expected, then the FOMC expects three quarter-point increases in 2018 and three more in 2019, bringing the federal funds rate to 3%, the Fed’s preferred level. Yellen and her colleagues will also be on the lookout next year for any inflationary effects of President Trump’s proposed tax cuts and spending on the military and infrastructure, if those measures get through Congress.

We think the yield on the 10-year Treasury note will hit 3% by the end of 2017, up from 2.5% currently. While there is considerable uncertainty about how much inflation will pick up due to both higher energy prices and the ultimate economic impact of Trump’s spending policies, the trend in rates will be upward in the near term. If Trump gets the tax cuts and spending increases he wants, then rates might move up faster in anticipation of higher inflation.

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Look for the Fed to keep replacing maturing securities in its $4.5-trillion portfolio for the foreseeable future. But eventually, it will need to end the practice. Since 41% of the Fed’s portfolio is in mortgage-backed securities, that could cause a bump up in mortgage rates when the course is reversed.

By the end of 2017, expect the average 30-year fixed mortgage rate to rise to 4.6%, with 15-year fixed mortgage rates at 3.8%.

Source: Federal Reserve, Open Market Committee