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Economic Forecasts

Next Fed Rate Hike Likely in December

Kiplinger's latest forecast on interest rates


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 1.9% by end '17 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 More »

The Federal Reserve is likely to raise interest rates on December 14, not at its November meeting. A decent employment report for September, and presumably for October and November as well, should provide the Fed with some cover to act. The September report showed that the unemployment rate ticked up because more folks came into the labor force to start looking for work, a sign of optimism. Also, more part-timers found full-time work. The Fed is highly unlikely to change rates on November 2, just six days ahead of the presidential election.

Even with a December 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 itself to getting the federal funds rate up to a more “normal” level of 3%, will rates show a sustained upward trend. The 10-year Treasury bond rate is likely to end 2016 at its current value of 1.7%, because the Treasuries market has already priced in the Fed’s first hike in a year.

See Also: All Our Economic Outlooks

In 2017, there may be downward pressure on rates in the early part of the year as Brexit issues take center stage once again. However, this is likely to be temporary. As a result, the Fed seems likely raise the bank prime rate and other short-term rates at least once, bringing the 10-year Treasury rate at the end of the year to about 1.9%. 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 above zero before the next recession, so that it can cut them to support the economy when needed. The negative interest rate policy that has been deployed in Europe and Japan will likely never be adopted in the U.S.


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 2017, we see the 10-year Treasury note rate at 1.9%. Expect the average 30-year fixed-rate mortgage to edge up to only 3.7% by then, with 15-year rates below that.

Source: Federal Reserve, Open Market Committee