InterestForecasts for 2016
Short-terminterest rates have remained near the 0% mark for more than a decade.The rates got a boost after a proposed raise by a quarter percentagein December 2015.In the year 2016, the rates are expected to besomewhere between 0.5% and 2.5%. The rates are based on the currentprices on the futures market. Since investors put their money wheretheir mouths are when investing in futures tied to interest rates,they anticipate a gradual tightening of the monetary policy.According to the March futures, there is a two-third chance for theFed to boost the rate by another quarter percentage point (Lim).
Thefuture markets indicate conservative moves of the future movement ininterest rates compared to the Fed. FOMC projections indicate thatthe funds rate is anticipated to be between 0.9% and 2.1% in the year2016. Besides, it predicts the rates to rise from 1.9% to3.4% in theyear 2017. According to the median statistics, the Fed funds areexpected to finish at 1.4% by the end of the month of December 2016(Greffner).
Basedon the GDP levels, the Fed hopes that the current growth andinflation will remain near the recent levels. Consequently, itexpects fair moves in the interest rates in the year 2016. Similarly,the central bank expects the real Gross Domestic Product toaccelerate slightly in the year 2016. The central bank expects theinflation rate to get much closer to 2% after the downward impact offalling energy prices (Kane). Besides, majority of the worldeconomies have entered into a deflationary period. It is consequentlyexpected that interest rates will follow a downturn for the next onedecade. For example, the US Fed has been grappling with near zerointerest rates. Japan among other European countries has kept theirpolicy rate below zero too (Lim).
Similarly,according to the bond markets, the interest rates are not expected torise at a quick pace due to the delayed spike in long-term bonds.Whenever bond investors expect tight monetary activities, they pushfor higher yield rates. Currently, it is unlikely that Fed wouldallow for a rise in interest rates due to the potential harm togrowth, as people prefer risk-free treasuries (Greffner).
Fedis expected to increase the short-term interest rates by 1.5% pointsin a year depending on the immediate condition of the economy. Astrong economy might require the increase to be postponed while adecline can spur a rise in the short-term interest rates. The lowinflation rates shall cause Fed to tighten its monetary policy forinflation gauge- personal consumption index to rise by a slight 2%from its current 1.5%. The idea behind the Feds thinking is due toone-year time lags that occur between Fed’s action and the effecton the economy (Kane).
Kane,Charles. Here`s Why Negative Interest Rates Are More Dangerous ThanYou Think.Fortune.14 March 2016. Web. 15 March 2016. Available at<http://fortune.com/2016/03/14/negative-interest-rates-european-central-bank/>
Lim,Paul J. Does the Fed Have the Guts to Raise Interest Rates? Money. 27Jan 2016. Web. 15 March 2016Available at<http://time.com/money/4194732/federal-reserve-interest-rates-stock-market/>
Marcie,Geffner. Interest Rate Forecast for 2016.Bankrate.4Jan. 2016. Web.15 March 2016. Available at<http://www.bankrate.com/finance/mortgages/interest-rates-forecast.aspx>