Montecito Connection: Sep – Oct 2016 – Interest Rate Watch

Well, Are Interest Rates Going to Rise or What?

by Mark Schniepp • August 24, 2016

The Fed and Interest Rates

Last December, the Federal Reserve indicated it planned to raise interest rates four times in 2016. But economic conditions deteriorated in January and the stock market tumbled 1,000 points.

Then Janet Yellen, the Fed Chair, stated last March that at least two interest rate hikes were expected during 2016. And as of June, the likelihood of those two interest rate moves had not changed.

“…. Speaking for myself, although the economy recently has been aff ected by a mix of countervailing forces, I see good reasons to expect that the positive forces supporting employment growth and higher infl ation will continue to outweigh the negative ones.”
— Fed Chair Yellen,
June 6, 2016

In fedspeak, that meant that the economy had strengthened (especially the stock market and the job market), and that higher rates were now both warranted and justified.

But the Fed held pat on interest rates in June and July. Their next opportunity is on September 20 or 21, less than a month away.

A Major Distraction

But now, however, we have a major distraction in the U.S. that won’t be reconciled until after the fi rst week in November. Therefore, it’s becoming less certain that the Fed will raise rates in September, and certainly not on November 2 (when they meet) right before the Presidential election.

So even though the U.S. economy remains strong, everyone who wants a job has one, the stock market is at all time record highs, and mortgage interest rates ar e at all time record lows, there is a strong likelihood that interest rates will stay where they are, at least until
mid-December of this year.

What this all means is that rates are NOT going higher this year. Expect the currently record low rates for auto and home loans to remain low, at least going into November.

After that, I think it’s a 50-50 chance that the Fed will raise rates in December, and then you may see some rise in mortgage rates. Until then however, refinance your home or buy another one. You’re not likely to see rates this low for quite some time.

Dr. Mark Schniepp is Director of the California Economic Forecast in Santa Barbara. The company prepares forecasts and economic commentary on the regional economies of California.