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Economic Forecasts


The Fed Rumbles on Rates

GDP 1.4% growth for the year; a 2% pace in '17 More »
Jobs Hiring slowing to 150K-200K/month by end '16 More »
Interest rates 10-year T-notes at 1.4% by end '16 More »
Inflation 1.5% for '16, 2.5% in '17 More »
Business spending Flat in '16, slight gain in '17 More »
Energy Crude oil trading from $40 to $45 per barrel in Sept. More »
Housing Prices up 5% on average in major metro areas More »
Retail sales 4% growth in '16, compared with 4.8% in '15 (excluding gas) More »
Trade deficit Widening 4% in '16, after a 6.2% increase in '15 More »

Recent comments by Federal Reserve Chair Janet Yellen signal a greater willingness to raise interest rates. In fact, though the Fed has cried wolf before, it will likely raise rates at least once this year, either in September or December. (The Fed won’t act on November 2, less than a week before the presidential election.) The only thing that might delay a decision is fresh turmoil once Britain formally declares it is leaving the European Union.

See Also: All Our Economic Outlooks

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 itself to making progress on getting the federal funds rate up to a more “normal” level of 3%, will rates show a sustained upward trend.

In 2017, it seems likely that the Fed will 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 thinks it is important to get interest rates some distance from zero before the next recession, so it can cut rates 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 United States.

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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 portfolio is in mortgage-backed securities, delaying the move to stop replacement 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, just below where it is now. By the end of 2017, it 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

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