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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.

  |     |   Comment #1
On Bloomberg this afternoon it said the market has gone up because people were getting out treasuries and buying the energy stocks pushing the market up since the elections. They were purchasing the polluting energy stocks because Russia has taken over vast amounts of important gas and oil lines in Syria and other nearby nations in that area and is helping with the production. Russia also has been printing Syrian money since 2012 selling arms worth nearly 5 billion to Syria supporting Assad.
  |     |   Comment #2
The FED has been tinkering around the edges since the Gspan era. With all the information overload, lies, deceit, half truths and BS they don't know what to do. Under the guise of inflation fighters their real worry is deflation. So let them worry, that's their job. We will endure the fallout, that's our job.
  |     |   Comment #3
what do you think the best deal in 2017 will be for a 5yr cd ? ...3.5% ????
  |     |   Comment #8
Decades, I gave up trying to "predict" interest rates many years ago. Rates for 5-year CDs depend on so many variables. While the "going rate" seems to be in the neighborhood of 2.25% these days, if the Fed raises the FFR three times next year (25 bps X 3), and if the 5-year rates move accordingly (a big "if"), we might be looking at 3% 5-year CDs. That said, there will always be outliers like Andrews who want to get ahead of the yield curve and entice you with extra yield. Just have to be nimble. As always, "nimble" is easier said than done, so maybe the proper word is "creative".
  |     |   Comment #4
If 5 year is a 3.5 that works for me!
  |     |   Comment #5
It would work for me, also. Although there was a time, way back when, I wouldn't open a CD account for anything less than 1% per year of the CD term. i.e. a 3 year CD @ 3%, a 5 year CD @ 5%.
  |     |   Comment #6
My favorite on-line bank is Ally, however, I have been very disappointed with their decision to lower the 5-year CDs when other banks seem to be raising them over the past few months. Ally Banks 1.75 % should at least be 2.15 to keep in line with others. Robert Ray
  |     |   Comment #9
To: Anonymous (Comment #5). "Way back when" wasn't really all that long ago. In August of 2006, when I started building my IRA CD ladder, obtaining 5.75%+ on a five-year IRA CD was easy. After the bubble burst, it did become harder to find good deals, but KeyDirect was still offering 5.5%+ for a 10-year in January of 2008, and 4% wasn't hard to find on 5-year CDs. In the summer of 2010, I snagged a 3.8% 7-year from USAA and two 3.5% 7-years from PenFed. So, the CD market was slow to react. I might suspect the CD market will be slow to react as we enter a rising-rate environment.
  |     |   Comment #13
To (Comment #9) : You have to go back way further than that for much higher interest rates and for a longer period of time. You must be too young to have appreciated those CD rates.
  |     |   Comment #14
To: Anonymous (Comment #13). As I start RMDs this year, I'm flattered. Actually, I do recall the late 70's and early 80's, when CDs were well into the double-digits. However, so was inflation. They were not happy times.
  |     |   Comment #7
I guess inflation is on the way and with a tv celebrity president ready to print dollars for projects it could explode. And we have 20 trillion in debt so increasing the fed funds rate could bankrupt the country on interest. There are going to be some difficult choices to make in the next 4 years that will makes things pretty unpleasant. Just saying.
  |     |   Comment #10
To: Anonymous (Comment #7). Chin up, the Republic will survive. Our very first TV celebrity President (Ronald Reagan) is remembered quite fondly.
  |     |   Comment #11
Taught the Donald how to "act."
  |     |   Comment #15
It would be great if President Elect Trump learned from President Reagan and followed his example.
  |     |   Comment #12
Our politicians in Washington, both parties, have been spending and giving billions of dollars away to foreign countries that we don't have for decades. It's anybody's guess as to when and how it is going to all end.
  |     |   Comment #16
#7 Interest on the National Debt is currently under 10% of the annual budget. It's out of control entitlement and defense spending that's far more likely to create problems than a rise in the Federal Funds rate.
  |     |   Comment #17
To: Anonymous (Comment #16). The irony is, should the incoming President-elect be believed, taxes will be cut, entitlements will be untouched, and infrastructure and defense spending will balloon. None of this pencils out. Calm down. Trump will run smack dab into the separation of powers. He's the incoming President, not the incoming Emperor.
  |     |   Comment #18
Separation of powers was intended to create checks and balances with the three branches of our federal government, unfortunately presidential executive orders tend to skirt the system. However the Democrats are already building a wall to block any attempts by our PRESIDENT elect Trump to do what is right for our country.
  |     |   Comment #19
Ken, reading comment #18 one has to ask...is Fox News on board now?
  |     |   Comment #20
Why thank you for the compliment, but no, I do not represent Fox News. I'm just one of many of Donald Trump's "Deplorables" as Hillary called us.
  |     |   Comment #31
So you are one of the MINORITY of voters.
  |     |   Comment #25
They will fail at that too.
  |     |   Comment #21
wow ..Trump not even in office yet and he's already creating jobs/wealth ......get this economy smoking and rolling then they will have to raise interest rates. This rate environment has been terrible and its crushed many retired peoples incomes.Took my 90 year old parents out to dinner sunday night and they were saying how they wait for toilet paper to go on sale at rite aid ...this has been rediculous !
  |     |   Comment #22
Threats are not policy
  |     |   Comment #24
Ever hear of MAD?
  |     |   Comment #29
In the world of politics, it may be the only way to get things done. As long as it's not illegal, sometimes you just have to force the issues. Better than all the behind the behind closed doors bribery that goes on between politicians and lobbyists.
  |     |   Comment #23
Hey, those 90-year old parents got it right. $4/12 pack at Rite-Aid. My wife just told me she does the same thing...wait for the sale. For two people in 2016 she logged over $1800 in "savings" with coupons for food, gas and anything else she/we purchased. We track every penny and it's quite amusing at the end of the year to see where the money didn't go! We have friends who laugh at using coupons but then they fly coach. My wife prefers A2/B2 seating and I never argue.
  |     |   Comment #28
Washing ourselves because Trump put his hands where they didn't belong?
  |     |   Comment #26
Decades, I enjoyed the bit about "smoking and rolling". Folks here in California who have PTSD (Post-Trump Stress Disorder) are doing just that, except they generally roll before they smoke.
  |     |   Comment #30
Come on guys lets get real here interest rates have only been this low since Obama has been president. In every other year I was able to get 5 year CD's at 5-7%! Now that he is leaving interest rates will be going back up as long as the debt doesn't keep climbing out of control. So many liberals on here that can't seem to figure out that it is Democratic policies that have directly led to these pathetic interest rates. The Democrats can't let go of Obamacare even though it is killing us unsubsidized tax payers with out of control health care costs.
  |     |   Comment #32
"You have to pass it to find out what's in it".....With the support of W's Johnny Bob R. It took two to tango. Get ready to see what leadership looks like, sadly lacking from latest the string of hapless imposters.
  |     |   Comment #33

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