US Outlook Report: Replacing Liftoff with Gradual Levitation
The word “liftoff” brings visions of a rocket on the launch pad ready to vault into outer space. But recent downward revisions to our growth outlook for 2016, suggest a far calmer interest rate normalization approach, more like a day old helium balloon that is able to levitate off the floor, but can’t quite touch the ceiling. Compared to previous tightening cycles, interest rate increases this time around we will be riding a glacier not a rocket.
While I still believe the FOMC will raise interest rates for the first time at their December 2015 meeting, I no longer see a steady, every-other-FOMC-meeting move higher from there for 2016. I removed one 25-basis-point rate hike from our 2016 interest rate forecast. After the December 2015 initial hike, I expect a longer pause before the next leg higher. We are penciling in the next increase at the April 2016 FOMC meeting, another increase in September, with the last one for the year coming in December 2016.
While not as pessimistic as the Fed Funds Futures market, which currently forecasts no rate hikes in 2015 and only two next year, our latest Fed funds rate forecast is now about a quarter percentage point below the FOMC’s September “dot-plot” guidance for year-end 2016, and a half a percentage point below their year-end 2017 guidance.
For the United States, we expect the push and pull from relatively robust consumer spending and housing demand to be nearly equally balanced by relative weakness in business spending, industrial production, exports, and business inventories in the quarters ahead. This counsels for a more nuanced and data-dependent approach to interest rate normalization in the quarters ahead than one that keeps to a set every-other-meeting schedule.
This rate outlook bodes well for home buyers. Even though Halloween is approaching fast, future mortgage rates don’t look too scary. If you are looking to buy a house or car over the next twelve months, the sticker shock on your monthly payments might not be as bad as you thought.
To learn more, check out this week’s US Outlook Report.
Tags: economy, finance