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Economic Forecasts


Interest Rates to Change Little Till Fed Acts

GDP 2% growth for the year, down from 2.4% in '15 More »
Jobs 195,000 new hires a month through '16 More »
Interest rates 10-year T-notes at 2.1% by end '16 More »
Inflation 2.4% for '16, up from 0.7% in '15 More »
Business spending 4% gain in '16, after drop in '15 More »
Energy Crude oil trading at $40-$45/bbl. by July 4 More »
Housing Construction of single-family homes up 15% this year More »
Retail sales 4.2% growth in '16, from 4.7% in '15 (excluding gasoline sales) More »
Trade deficit Widening 4% in '16, after a 6.2% increase in '15 More »

Odds now favor only one interest rate hike this year, in either late July or December, if employment and other economic data show more signs of life, as we expect they will start doing in the second half of 2016. With economic momentum in the U.S. and abroad slow to develop so far, the Federal Reserve likely won’t have enough evidence of forward economic momentum to justify a rate hike at its June meeting. Also giving the Fed pause in June: a scheduled June 23 vote in Britain on whether or not to remain in the European Union. A vote to leave would surely roil the global economy and financial markets.

See Also: All Our Economic Outlooks

And since the Fed will bend over backward to stay out of presidential election politics, there’s no way it will even consider acting on rates at meetings in September and early November, with campaigning in full swing.

That leaves just the July or December meetings as the most viable options for raising rates. If the economy starts picking up momentum sooner rather than later, then July would be the month. If not, then December looks more likely. (Possible, though much less likely, are rate increases at both meetings.)

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Until the first rate hike, we expect interest rates to remain at very low levels, with the 10-year Treasury note yielding about 1.8% or so. Any fresh economic upheaval, such as Britain’s exit from the EU, could drive rates even lower. The U.S. dollar remains the world’s safe haven currency.

Look for the Fed to also back off its previous vow to stop replacing maturing securities among its $4.5-trillion portfolio following its quarter-point hike in short-term rates this past December. Our bet is that the Fed will wait until 2017 to stop replacing maturing securities. Since 41% of its portfolio is in mortgage-backed securities, delaying the move should be beneficial for mortgage rates this year.

By the end of 2016, we see the 10-year Treasury bond rate at 2.1% versus 1.7% now, and the 30-year mortgage rate at 3.9%, from 3.6%.

We expect more frequent interest rate increases in 2017. Eventually, the Fed will realize that it’s not getting very far in “normalizing” short-term interest rates back to the 3% level, and it will mull accelerating hikes once it appears safe to do so in light of an improving economy. Moreover, growing tightness in the labor market in the form of a very low unemployment rate and the beginnings of wage pressures will cause inflation expectations to rise, boosting the push for higher rates.

Source: Federal Reserve, Open Market Committee

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