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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 175K/month in '17 More »
Interest rates 10-year T-notes at 2.7% by end '17 More »
Inflation 2.1% in '17, same as in '16 More »
Business spending Rising 3%-4% in ’17, after flat ’16 More »
Energy Crude trading from $47.50 to $52.50 per barrel in August More »
Housing 6% price growth by end of '17 More »
Retail sales Growing 3.8% in '17 (excluding gas) More »
Trade deficit Widening 4% in '17, after nearly flat '16 More »

The strong April jobs report raises the odds of the Federal Reserve hiking its benchmark interest rate at its June 14 meeting. The Fed is attributing the poor first-quarter GDP report to temporary factors, and the tightening of the labor market in April will keep the central bank on track to continue raising rates this year.

The Fed appears committed to a path of steady rate hikes. It will probably lift short-term rates by a quarter of a percentage point two more times in 2017, the first at its meeting on June 14 and the next on either September 20 or December 13.

If the economy keeps growing as expected, the Fed’s monetary policy committee (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. Fed Chair Janet 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.

See Also: All Our Economic Outlooks

We think the yield on the 10-year Treasury note will hit 2.7% by the end of 2017, up from 2.35% currently. While there is considerable uncertainty about how much inflation will pick up because of higher energy prices and the ultimate economic impact of Trump’s spending policies, the trend in rates will be upward in the near term.

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Look for the Fed to keep replacing maturing securities in its $4.5-trillion portfolio for the foreseeable future. It is talking about ending the practice but seems unlikely to do so this year. With 41% of the Fed’s portfolio in mortgage-backed securities, halting purchases of new securities could cause a bump up in mortgage rates, something the central bank wants to avoid.

By the end of 2017, expect the average 30-year fixed-rate mortgage to rise to 4.4% from 4% now, with 15-year fixed mortgage rates reaching 3.7% versus 3.3% now.

Source: Federal Reserve, Open Market Committee

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