Lingering Fed questions still remain

November 30th, 2016 5:17am
The Fed is likely to raise rates in December.

To raise or not to raise interest rates? That is the question on the minds of economists, businesses, consumers and the members of the Federal Reserve Board themselves. It's also a question that appears to get more difficult to answer as the days pass and the incoming Trump administration signals opposing economic and fiscal policies that could undermine any decision the central bank makes.

On the surface, the Fed is poised to hike its federal funds target range by 0.25 percent sometime in December. Analysts and investors have so much confidence in the probability of a December hike that the market has already priced the increase into its most recent contracts, MarketWatch reported.

Federal funds futures contracts - wagers on the likelihood of future rate hikes - rose to 100.2 percent Nov. 22. After a December increase, the market is also betting on additional (one or two) hikes in 2017. This would place the overnight interest rate at anywhere between 0.75-1.5 percent, more than double its current position.

So what are others saying about the future of interest rates?

December is key, but so too is January
Many insiders consider the Fed to be a little late to the game in reference to raising interest rates; nearly a year has passed since the last hike. Part of the trepidation in 2016 came from the slowing growth of the economy as well as the presidential election in November. Historically, the central bank chooses to wait until after an election before making concrete decisions that would have such large-scale ramifications. And with his upset win last month, President-elect Trump has publicly intimated some of his misgivings with how current  Federal Reserve Board ChairJanet Yellen has conducted business in recent months.

Part of this consternation has risen out of opposing viewpoints on the future trajectory the American economy and the relationship between the executive branch and the central bank. One of the key sticking points among Fed board members is the issue of inflation and how the economy could potentially absorb higher rates while still keeping a lid on price growth.

CNBC reported some analysts familiar with the Fed are predicting recurring disagreements between Fed policy and executive policy. For instance, Trump, along with the Republican Congress, has signaled he intends to slash tax rates while introducing a massive infrastructure spending bill at the same time. The premise of increasing spending without having the tax revenue to pay for it doesn't sit well with monetary policymakers, who in time may resort to cutting interest rates in an effort to offset inflationary effects of Trump's policies - the exact opposite of what the central bank has been aiming to do for a year.

That's why many insiders expect the Fed to go ahead with an increase in interest rates in December before the incoming administration is sworn in. Then, the real test comes in January and beyond, when the two arms of government will need to have similar goals in mind.

Whether the president and Congress do in fact move forward with their policy proposals is still up in the air, yet come January the ball will be in their court as to what the future of economic policy will look like.

On the prospect of a December rate hike, Yellen all but guaranteed raising rates soon, according to MarketWatch​.

"Were the FOMC to delay increases in the federal funds target range for too long, it could end up having to tighten policy relatively abruptly to keep the economy from overshooting both of the Committee's longer-run policy goals," said Yellen. "Moreover, holding the federal funds rate at its current level for too long could also encourage excessive risk-taking and ultimately undermine financial stability."

How 2017 could shape up
The next Fed meeting takes place Dec. 13 and from the sounds of those close to preliminary discussions, many are already considering a rate increase "baked in," meaning a done deal, according to Bloomberg. Likewise, this decision will set the stage for how 2017 could play out.

At the moment, financial news magazine Barron's projects two rate hikes in 2017 and the a few more in 2018. Some are even predicting a target range of 2.25 percent by EOY 2018, a sharp jump that would make consumer and business lending more expensive but would also help pad retirement accounts that rely on compound interest growth.

"Despite plans for fiscal stimulus, it is doubtful that the FOMC will alter the 2017 Dot Plot projections" said Ward McCarthy, chief financial economist at Jeffries, according to Barron's. "If the politicians do cut taxes and increase spending at some point in 2017, then the Fed is likely to pursue a somewhat more aggressive normalization after the stimulus has been put in place. 2018 could be an inflection point."

What could be the deciding factor in how quickly the Fed chooses to ramp up interest rates is whether the economy continues to perform on par with previous levels of growth or if Trump's proposals will boost growth even further. Much of this comes down to compromise on Capitol Hill and just how ardent the administration will be in pursuing such high levels of spending in the face of cutting tax rates on most American consumers and businesses.

Bloomberg noted that in advance of the the Fed's meeting in two weeks, the central bank will receive another month's worth of payroll figures as well as an inflationary report outlining the status of price appreciation. Both of these will likely influence board members in some way, yet most insiders aren't anticipating big news out of either document.

For homebuyers uncertain of when to purchase a home, the answer is likely dependent on one's budget. Mortgages will tend to increase in cost over the coming year so the best bet would be to reach out to an agent now to see what prospects are in a buyer's price range.

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