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Economic Forecasts

Brexit Vote Puts Damper on Interest Rates

GDP 1.8% growth for the year, down from 2.4% in '15 More »
Jobs Hiring slowing to 150,000/month by end '16 More »
Interest rates 10-year T-notes at 1.4% by end '16 More »
Inflation 1.8% for '16, up from 2.4% in '17 More »
Business spending Flat in '16, after drop in '15 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 »

The vote by Britain to leave the European Union has completely changed the outlook for interest rates. Rates should stay low for an extended period of time as U.S. Treasury notes and bonds remain important safe haven investments in the face of uncertainty over growth in Europe and Japan. In fact, the Federal Reserve is likely not to raise interest rates at all this year as a result. Even before Brexit, Fed Board Chair Janet Yellen had used the word “uncertain” 37 times in her press conference and in her testimony to Congress. And now things are going to be even more uncertain for a while: Growth in Europe is likely to be diminished, and the high value of the Japanese yen could push Japan into recession. In fact, there is a possibility that a sudden deterioration in Europe’s or Japan’s outlook could cause interest rates to drop further.

See Also: All Our Economic Outlooks

It seems likely the Fed will raise short-term interest rates like the bank prime rate at least once in late 2017. 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 hits, so that it will be able to 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 U.S. But the frequency of U.S. rate hikes will depend on how quickly global financial uncertainties can be resolved, and whether other central banks are still reducing their interest rates and easing their monetary policies next year.

Look for the Fed to keep replacing maturing securities in its $4.5-trillion portfolio for some time to come. Since 41% of its 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%, just slightly below where it is now. By the end of 2017, it should rise a tad to about 1.6%. Expect the average 30-year fixed rate mortgage to stay at a low 3.5% through next year, with some rates below that. Homeowners should check to see whether it is worthwhile to refinance yet again.

Source: Federal Reserve, Open Market Committee

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