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Economic Forecasts

Next Fed Rate Hike Likely in December

Kiplinger's latest forecast on interest rates

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GDP 1.4% growth for the year; a 2% pace in '17 More »
Jobs Hiring at 150K-200K/month through '16 More »
Interest rates 10-year T-notes at 1.4% by end '16 More »
Inflation 1.7% for '16, 2.4% in '17 More »
Business spending Flat in '16, slight gain in '17 More »
Energy Crude oil trading from $40 to $45 per barrel in Dec. More »
Housing Prices up 5% in '16, 6% in '17 nationally More »
Retail sales Growing 3.4% in '16 and '17 (excluding gas) More »
Trade deficit Widening 4% in '16, after a 6.2% increase in '15 More »

The Federal Reserve is likely to raise interest rates in December, not at next week’s meeting. A little strength in inflation seems to guarantee a hike this year. Poor manufacturing and retail data make a move unlikely at the September meeting, and the board is highly unlikely to change rates on November 2, just six days ahead of the presidential election.

Even with a rate hike, interest rates will likely stay low and fluctuate within a narrow range for some time to come. Only when inflation shows a stronger upward trend, or when the Fed commits to making progress on raising the federal funds rate to a more “normal” level of 3%, will rates show a sustained upward trend. Recent pressure that pushed the 10-year Treasury bond rate to its current value of 1.7% has been linked to anticipation of the Fed’s first hike in a year. This pressure ought to subside once the hike occurs. Also, a small rise in the value of the dollar has made Treasuries slightly more expensive for foreigners.

See Also: All Our Economic Outlooks

In 2017, the Fed seems likely to raise the bank prime rate and other short-term rates at least once or twice. The beginnings of upward wage pressure will cause inflation expectations to rise a tad, strengthening the case for slightly higher rates. Also, the Fed says it is important to get interest rates some distance from zero before the next recession, so it can cut them and support the economy at that time. The negative interest rate policy that has been deployed in Europe and Japan will likely never be adopted in the U.S.

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Look for the Fed to keep replacing maturing securities in its $4.5-trillion portfolio for some time. Since 41% of the Fed’s portfolio is in mortgage-backed securities, delaying the move to end the replacement practice should keep mortgage rates low this year and next.

By the end of 2016, we see the 10-year Treasury note rate at 1.4% if the Brexit trigger has been pulled, but around 1.7% if it has not. By the end of 2017, the rate should rise a tad to about 1.8%. Expect the average 30-year fixed rate mortgage to edge up to only 3.7% by the end of 2017, with 15-year rates below that.

Source: Federal Reserve, Open Market Committee