March Interest Rate Hike is Becoming More Likely

Federal reserve building in Washington DC superimposed on twenty dollar billAcross the world, governments and economies are being shaken to the core. Political tensions and economic uncertainty have risen sharply over the past year. Additionally, the global economy is being tested in new ways. Global trade is weak and political tensions may hamper trade even further, while debt issues loom large in nearly every wealthy nation. The outlook for the global economy is cloudier than ever. But there is one dim light shining still.

The United States economy was rocked by the subprime mortgage crisis and subsequent recession. The extent of the damage, which was severe, and the pace of the recovery has been difficult to fully measure, but there are clear signs that the economy is gradually getting back on track. The reality is reflected by the fact that the Federal Reserve has twice risen interest rates from a historical low of between zero and 0.25 percent since December, 2015. And it looks like another interest rate hike is coming soon.

Despite the political turmoil across the globe, the US economy and other parts of the global economy are trudging ahead. At the Federal Reserve’s meeting on Jan. 31-Feb. 1, policymakers with the Fed voted to keep the federal funds rate at between 0.50 and 0.75 percent. But many of the policymakers said the US economy was prepared for another rate hike sometime soon. Fed Chair Janet Yellen also discussed at the meeting the issues with waiting too long to raise interest rates.

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Since the Fed raised interest rates at the end of 2015, investors have been speculating on the timing of further rate hikes. Some investors believed last year that the Fed would raise interest rates multiple times to accommodate rising winds in the US economy. But those winds died down and the central bank only increase interest rates once at the very end of 2016. The pace of the past two rate hikes has been one rate hike per year. But now just a few months into 2017 and policymakers are beginning to hint at another.

Since the Federal Reserve’s last meeting at the end of January and the beginning of February, several members of the Fed, including the central bank’s Chair Janet Yellen, have stated publicly that interest rates would need to be raised at an upcoming meeting. Earlier in the month, Philadelphia Fed President Patrick Harker  supported a March interest rate hike, saying “I think March is on the table. I would never take a meeting off the table.” Some major Wall Street institutions also seem to support a more quickly-paced rate hike. Both Goldman Sachs and JP Morgan Chase, the two largest investment banks in the world, have increased their expectations of a rate hike.

But while many big players and top regulators seem to be in agreement on a March rate hike, the bond market doesn’t seem to agree. A recent report  of the 23 primary bond dealers that trade with the Federal Reserve indicated that major bond dealers aren’t convinced on a March rate hike. Out of the 23 dealers, only one estimated a March rate hike, while most others predicted a June rate increase. For the past 25-years, interest rates were only ever raised when at least 50 percent of the top bond dealers predict the hike. But regardless of a March or June interest rate hike, the Federal Reserve and the other major financial institutions in the United States believe interest rates now need to be increase with more frequency.

Posted on March 7, 2017 by in Personal Finance

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