Expect a long wait between rate hikes
The Federal Reserve raised shortterm interest rates a quarter-point in mid-December to 0.25-0.5 percent. But Federal Reserve Chair Janet Yellen took pains to point out that additional rate increases may be a ways off.
The Fed wants to evaluate the impact of the December hike before pulling the trigger on the next one. Even though the Fed’s poll of Fed governors and reserve bank presidents cites an expectation of four more quarter-point rate hikes in 2016, the “data dependency” Yellen has vowed to follow will lead to long waits between increases because the data is seldom clear.
We expect the Fed to raise shortterm rates just twice in 2016: Once in the summer and a second time at the end of the year. By the end of 2016, the 10-year Treasury bond rate should be 2.7 percent, versus 2.3 percent now, and the 30-year mortgage rate 4.4 percent, up from 4 percent at the end of 2015.
Long-term rates are likely to stay relatively low for a while because U.S. Treasuries will continue to be attractive. Among the reasons:
Consumer prices in the U.S. are unlikely to rev up much anytime soon. Prices excluding food and energy have been fairly stable, rising 2 percent or less annually for several years now, and the rise in the dollar will keep a lid on prices of imported commodities.
China’s growth is likely to continue slowing, keeping its central bank committed to easier monetary policy. It has cut its main interest rate six times in less than a year.
The European Central Bank will stay on an expansion path, despite improving growth in Europe. Likewise, Japan’s central bank will continue its easing policies.
The Fed won’t want to further boost the value of the dollar by making it even more attractive with higher rates, so it will be sparing with rate increases.