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Interest Rate Hike Outlook for 2016

rates-riseRemember the interest rate hike that occurred last month? Wondering what's next?

Mark Hamrick, Senior Economic Analyst at Bankrate.com provides some insight on what to expect from the Federal Reserve in the new year and why this is likely to not be the entity's last move.

MReport: How will the Fed’s decision to raise mortgage rates play out in 2016 in the housing market? What about HELOC rates?

Hamrick: Some of this is very difficult to forecast because the overall direction of interest rates, while having been at record low levels at the Federal Reserve, has been presumed to be higher over time at the timing of when we would get what the Fed called “liftoff” has been very difficult to pinpoint. Similarly, the performance of the global economy, when looked at as a single entity for the purpose of this discussion, how that presents itself has been equally challenging and even the U.S. recovery has been difficult. This is another way of saying that there is a high degree of risk in making any forecast relative to the outlook for interest rates, but we can start with some of the things that are easy to identify.

We go the first increase in the federal funds target rate last month and that was a quarter of a point. We got the summary of economic projections that member of the Fed itself and assume that we can expect roughly four interest rate increases in 2016. Now, the financial markets are telling us that this is not likely.

MReport: Do you believe that the rate increase was done at a time of optimal economic and housing market health or was it done too soon?

Hamrick: We can say for sure that this was a long time coming. Like forecasting a recession, truthfully we only know about the wisdom of monetary policy after the fact. We know that in the past when the Fed has made mistakes, that can only be measured by what happens after the fact. There are plenty of people years ago who are screaming that monetary policy was risking ignition of hyperinflation. Obviously that hasn’t happened.  If anything, inflation remains below the Fed’s own target of 2 percent. The issue for the global economy has been a decline in commodities and fuel prices so that’s not hyperinflation. All of this just shows how difficult it is to figure these things out.

In terms of the Fed’s timing, Fed Chair Janet Yellen said in a speech in December, where she set the table for the rate hike by saying the risks of waiting longer to get the rate hike in place outweighed the risks of keeping rates lower longer, and rates have been lower longer than anyone could have forecast.

Only time can tell. The Fed is doing the best it can given the fact that it is operating in unprecedented times to the extent that we had a financial crisis that in many ways was unprecedented. The Fed had to act alone because Congress was not prepared to do more than what it had done and the President can’t do many things alone without the approval of Congress. This is a point that both Chair Yellen and Bernanke have made repeatedly: it’s only so much that can be done with monetary policy and you need help from fiscal policy. Although another federal government shutdown was avoided this fall, but there are some longer-term physical challenges which continue to go unanswered by elected officials and it just once again underscores how the Fed is virtually a singular actor when it comes to dictating the course of the economy.

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