What will U.S. interest rates do in 2016?

Movements in the U.S. Federal Policy will impact fixed term interest rate products and the CAD/USD exchange rate, which, in turn, impact Canadian ag. How much movement will occur in 2016 is open to interpretation though: The decision to raise rates is based on numerous things that could change before the end of 2016. Craig Klemmer and Leigh Anderson weigh in on what they see as the likely movements in U.S. interest rates in 2016.

Craig Klemmer

U.S. interest rates will remain relatively unchanged

The U.S. Federal Reserve will hold interest rates constant through 2016, although a 0.25% increase is possible with strengthened economic growth. With a dual mandate to “maximize employment, stabilize prices and moderate long-term interest rates,” the Fed’s decisions rest on the country’s projected economic growth, health of the labour market, and inflation.

3 reasons why

1.Economic health remains lacklustre

First quarter estimates of U.S. GDP growth fell to 0.8% from 2015’s fourth quarter growth of 1.4%. Their expected growth of 2% in 2016 is stronger than most developed economies but still relatively weak. Weak economic growth elsewhere (e.g. Canada, China, Europe and Japan) is supporting the strong USD. As a result, 2016 U.S. growth has slowed as exports declined and imports increased. Any increase in the U.S. Fed Rate will only further increase the value of the U.S. dollar relative to other major currencies.

2. The labour market: Better, but not great

Overall, the labour market in the U.S. has seen significant improvement, declining from over 9% in 2009 and 2010 to less than 5% in 2016. Despite this improvement, there remains slack. Labour force participation rates (currently slightly below 63%) remain below pre-recession averages (66% between 2006 and 2008). An increase in the U.S. Fed Rate would discourage job creation, making it harder for the U.S. to improve the participation rate and the labour market overall.

3. Inflation

Generally speaking, Central Banks target overall inflation around 2%, a level that supports a strong and steady economy. Because raising interest rates tends to slow inflation, a rate hike is unlikely: Inflation is currently 1.1%. It hasn’t been close to 2.0% since October 2014.

Overall, the market isn’t signalling any need for raised interest rates in 2016.

 

Leigh Anderson

U.S. interests rates will rise at least once

The U.S. Federal Reserve raised interest rates for the first time in nearly a decade in December 2015. Although the Fed initially remained cautious despite the U.S. economic recovery from the financial crisis, the gains in employment and inflation indicators suggest a rate hike is soon needed.

3 reasons why

1. U.S. has added 200,000 jobs a month since 2011

Following the recent financial crisis, the U.S. economy suffered job losses for nearly 25 consecutive months ending in February 2010. It took until May 2014 to regain the nearly 8.7 million jobs lost, with approximately 200,000 jobs per month added since January 2011. Job growth slowed down in recent months, but a strong trend could resume soon.

2. Approaching full employment

U.S. unemployment remains low. While the Fed doesn’t have an official goal for maximum employment, the current rate is close to the Committee’s estimated long-run median normal rate of 4.8% unemployment.

With 13 million jobs added in the last five years, the U.S. is approaching full employment. Any additional jobs will put upward pressure on wages as there’s more competition for workers. Upward pressure on wages will lead to increased consumer spending and increased inflation later in 2016.

3. Core inflation is above the 2% target range

U.S. core inflation has been below the 2% target, but is currently increasing. The 2016 rate is above 2015 levels. In fact, recent economic data has boosted Fed confidence, with inflation currently at 2.1% and expected to remain above 2% in 2016.

The U.S. economy, poised to continue growing for the remainder of 2016, would be able to absorb higher interest rates. Monitoring the movements of U.S. interest rates allows you to understand economic trends that impact Canadian ag.