Interest Rate Predictions for 2017

Happy New Year! Will 2017 be the year when savers finally start seeing some relief from these ultra low interest rates?

You can find reasons to be optimistic in the last two months of 2016. First, the markets reacted positively to Trump’s election. Since the election, the 10-year Treasury yield has increased from 1.88% to 2.45%. According to this Wall Street Journal article:

Investors are betting that the prospect of expansive fiscal and economic policy under the new U.S. administration would lead to stronger growth, higher inflation and potentially a faster pace of interest-rate increases by the Federal Reserve.

December’s Fed meeting was another reason to be optimistic for rising rates in 2017. In addition to hiking the federal funds rate by 25 basis points, the Fed’s projections on future federal funds rates via its dot plot suggest we’ll see three rate hikes in 2017.

Those Fed projections proved to be way too optimistic last year. After the first Fed rate hike in December 2015, the Fed’s projections suggested four rate hikes in 2016. We ended 2016 with only one Fed rate hike in December. There are reasons why 2017 should be different than 2016. Economist Tim Duy described why he thinks three rate hikes in 2017 are more likely than one in this post from his Fed Watch blog.

Another reason we may see more rate hikes in 2017 is the addition of new Fed members. There are two vacant seats on the Fed’s Board of Governors that Trump can fill as soon as he takes office. The Senate will need to confirm them, but that should go smoothly for Trump. If those two new Fed members are inflation hawks, that should help ensure a faster pace of rate normalization.

Janet Yellen’s term as Fed Chair doesn’t expire until February 3, 2018. It’s unlikely that Trump will nominate her for another term. However, it’s possible, although unlikely, that she’ll stay on the Board after her chair terms expires. Her term as a Board of Governor lasts until January 31, 2024.

It’s possible that Trump could eventually have seven appointments to the Fed. You can read the details of the possibilities in this Forbes article.

How many Fed rate hikes will there be in 2017?

Last January, I asked readers to take a poll predicting the number of Fed rate hikes we would see in 2016. Many DA readers were on the mark with 27% predicting just one rate hike.

Let’s try again with a new poll. Do you think the three rate hikes that are suggested in the Fed’s dot plot are too optimistic? Will 2017 be a repeat of 2016 with just one rate hike? Or perhaps things are really changing, and we’ll see four or more Fed rate hikes in 2017. Please make your guess in the poll.

In a future post I will review some deposit account strategies and tips that may be useful for savers in 2017.