Interest Rates Probably Not Budging in 2016

During Alan Greenspan’s nearly 20-year reign as Chairman of the Federal Reserve, commentators used to look at the heft of the briefcase he carried to meetings to guess whether interest rates were about to rise or fall: thin case, no change; fat case, brace yourselves.

Greenspan left the Fed in 2006, not long before the Great Recession forced the nation’s central bank to drop its funds rate effectively to zero. It’s a tactic the Fed has used time and again to stimulate an economy in recession. Normally, the Fed starts to gradually raise rates when the economy begins to rebound and the employment outlook improves.

But these haven’t been normal times. Rates have only risen once since Greenspan’s retirement – a puny quarter-percent increase in the target rate last December – despite ongoing speculation that a steady drop in unemployment rates and a strong rebound in the financial markets make increases practical.

The Fed typically increases rates to slow a fast-growing economy and head off inflation. But inflation has been negligible in the past decade, and employment gains have come with little growth in income.

The Federal Reserve funds rate is the most important interest rate in the world, since it’s used to regulate U.S. economic growth. It sets the rate at which banks lend to one another, but also impacts short-term interest rates on customer deposits and can affect everything from interest rates on credit cards to bank deposit interest to interest on adjustable rate mortgages.

Until June, market analysts expected a rate increase in July, and perhaps another upward nudge late in 2016, but the betting essentially halted in June with the United Kingdom’s surprise decision to leave the European Union.

The British referendum – known as the Brexit vote – sent international financial markets into a frenzy of uncertainty. U.S. stocks took a dive as investors tried to make sense of a vote that will change the European economic structure. The plunge in U.S. equities lasted two days, but the European stock markets continued to struggle and the British currency – the pound sterling – fell to its lowest levels against the dollar since the 1980s.

The response wasn’t surprising. Investors looking for a safe place to park money turned to U.S. Treasury notes, and the flood of money coming from around the world drove Treasury note rates down sharply. The drop in Treasury notes offers evidence of an international financial market looking for a safe haven in uncertain times.

Taken together, global conditions seem filled with peril, not the sort of environment conducive to a rate increase. In addition, the U.S. economy continues to grow more slowly than many had expected at this point in the economic recovery. A rate increase now could slow the wobbly domestic economy and increase the price of U.S. goods, making them less competitive globally and hurting companies that export. Therefore, it seems unlikely the Fed would want to risk it.

Before the Fed acts on rate increases, it considers the rate of economic growth and the job market. Though the decade of low Fed rates helped the financial markets rebound, their impact on the economy hasn’t been nearly as dramatic, so the Fed is in a quandary.  It would like to raise rates so that it has leverage to stimulate the economy in the future, but it is loath to move now when conditions continue to look unstable.

The Fed — with its mission to nourish the domestic economy when it is weak – punted on rate increases during the first half of 2016. Given the added confusion that arises from the Brexit vote, the likelihood of a rate increase in the foreseeable future seem increasingly slim.

In debt? We can help!

  • Amount
  • Type
  • Contact

How much do you owe?

What can we help you with today?

Related Articles

graph showing upward economic trends

2014 Great Year For U.S. Economy, Can We Repeat In 2015?

By most accounts, the United States economy had a glowing year in 2014. Unemployment was down, spending was up, housing prices continued to bounce back and gas prices plunged to rates we never thought we’d see again. Then again, millions of Americans ...

Continue Reading
Woman looking at bills on the floor

Student Loans, Other Debts Are Stressing Americans More Than Ever

The American Psychological Association (APA) and the Federal Reserve Bank of New York aren't working together on the mental and fiscal health of America — but they certainly could. The APA released its annual "Stress in America" survey on Feb. 11 and ...

Continue Reading
Top Financial News Stories of the Year

Top 10 Debt-Related Stories of 2013

Some phase of the economy is the No. 1 news story almost every year, but 2013 offered an interesting twist: It was possible to argue that nearly every financial story had equal parts good and bad news attached to it. It all depends on how you view ...

Continue Reading
People shopping on the holidays in a store

Holidays a Tough Time to Reduce Debt

The inevitable collision between year-end spending and budget restrictions is making this an uncomfortable holiday season for two vital groups in the American economy: Consumers and the federal government. American consumers, still wary of carrying debt ...

Continue Reading
Highest consumer confidence index rating since 2007

U.S. Consumer Confidence Highest Since July 2007

The bull run on Wall Street and a continued surge in home prices pushed consumer confidence to its highest level in almost six years. The Thomson Reuters/University of Michigan consumer confidence index jumped to 84.5, up more than eight points from April ...

Continue Reading
Economic indicators show the economy is improving

U.S. Economy Is Slowly Improving

The snapshot of the U.S. economy in the first week of May looks unusually promising. Almost every arrow economists want pointing up – home sales, auto sales, stock market – is up. Meanwhile, interest rates and unemployment figures continue to ...

Continue Reading
Economic indicators like housing and spending are confusing.

Despite Positive Economic Indicators, Consumer Confidence Continues to Decline

American consumers are a step slow in accepting the news that the U.S. economy really is on the mend. Consumer confidence and retail spending dipped in March, while the rest of the economy puttered along at a good-to-great pace. Housing starts in March ...

Continue Reading
Airline ratings are up, but so are complaints and fares.

Airline Ratings Are Up — So Are Complaints and Fares

The U.S. airline industry is coming off its second-best year ever in terms of customer service, but it comes with a price: Complaints were up, and so was the average fare for flying. The Airline Quality Rating gave high marks to the 14 largest U.S. ...

Continue Reading
Get Help Now

Overwhelmed with debt? You have options for lower monthly payments!

x