Please enable JavaScript to view the comments powered by Disqus.

Economic Forecasts

Rates to Meander Until Trump’s Fiscal Policy Is Clear

Kiplinger's latest forecast on interest rates

iStockphoto

GDP 2.1% growth in ’17, following 1.6% in ’16 More »
Jobs Hiring pace should slow to 160K/month in '17 More »
Interest rates 10-year T-notes at 3% by end '17 More »
Inflation 2.4% in '17, up from 2.1% in '16 More »
Business spending Rising 3%-4% in ’17, after flat ’16 More »
Energy Crude oil trading from $55 to $60 per barrel in May More »
Housing Single-family starts up 9% in '16, 11% in '17 More »
Retail sales Growing 3.9% in '17 (excluding gas) More »
Trade deficit Widening 4% in '17, after nearly flat '16 More »

Despite some recent declines, interest rates are still likely to head higher over the course of 2017. Rates jumped after the presidential election because of the prospects for higher deficits and higher inflation, spurred by Donald Trump’s tax and spending proposals. But considerable uncertainty exists over how much of the Trump program will be adopted, when it will be adopted, and how it will be paid for. However, it is highly likely that sometime this year, it will become clear to bond markets that both the deficit and inflation are headed higher, pushing rates higher as well.

See Also: All Our Economic Outlooks

The Federal Reserve will also be hiking short-term rates at least twice this year, and possibly more if inflation gets out of hand. The Fed wants to raise them only gradually so as to avoid dampening economic growth. In fact, it doesn’t expect to reach its preferred level of 3% for short-term rates until sometime in 2020. And the expected inflationary effects of President Trump’s proposed tax cuts and spending on the military and infrastructure will be mostly pushed into 2018, so the Fed does not expect to have to hike rates aggressively this year to rein in inflation. But if prices rise faster than expected, the central bank might have to act faster.

Source: Federal Reserve, Open Market Committee

We think the yield on the 10-year Treasury note will hit at least 3% by the end of 2017, up from 2.5% 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 spending policies, the trend in rates will be upward in the near term.

Advertisement

Look for the Fed to keep replacing maturing securities in its $4.5-trillion portfolio for now. But eventually, it will need to end the practice. And since 41% of the Fed’s portfolio is in mortgage-backed securities, that could cause a bump up in mortgage rates when it reverses course.

By the end of 2017, expect the average 30-year fixed-rate mortgage to rise to 4.6%, with 15-year fixed mortgage rates at 3.8%.