The Fed Will Raise Interest Rates in 2016 Faster Than You Think
New York (/dec 28) Beware the ides of March, a fortuneteller warns Julius Caesar in William Shakespeare's play. The ides, or the 15th of the month, turns out to be the day of his death: a history-changing event that marked Rome's shift from republic to empire.
Two millennia later and an ocean away, it's once again becoming a portentous day, one that the biggest U.S. banks say may augur well for the country's ongoing recovery from the financial crisis. Or signal just the reverse.
Either way, the two-day meeting of the Federal Reserve's monetary policy committee that starts that day will be a turning point of sorts. It will signal to market watchers whether the economy is performing well enough for the central bank to continue raising interest rates after lifting them from nearly zero this month for the first time since the financial crisis.
A hike then would put the Fed on a path to raising rates four times by the end of next year, boosting them an additional 100 basis points, according to New York-based investment bank Goldman Sachs (GS - Get Report) . That's generally good news for banks whose interest income has been curbed by low rates since the financial crisis, though it's likely to cause trouble for high-risk borrowers and their lenders.
Gains of that size would yield a target rate of 1.25% to 1.5% next December, the highest since October 2008, when the Fed had already begun cuts to bolster the economy amid the financial crisis. That's in line with the consensus of committee members as of this month, but the market expects less. Of traders betting on interest-rate moves in 2016, the largest group -- 32% -- expect the Fed to set a range of 0.75% to 1% by year-end, according to Bloomberg data.
How the year-long shift will affect consumer purchases from automobiles to homes is not year clear and will depend heavily on labor market performance and salary growth.
This month's 25-basis point increase, however, was largely priced into the market already and both bank executives and Fed Chair Janet Yellen herself have said the critical part of interest-rate policy will be the pace of future hikes.
Goldman models built around the Fed's economic projections suggest an 80% probability of a second hike in March and a 66% chance of four increases by the end of next year, bank economists David Mericle and Daan Struyven said in a report.
That would be "well above the expectations currently priced," they noted. Should the Fed decide to peg an increase to a specific rate of inflation, that would lower the odds of a March increase notably. Requiring inflation of 1.5%, for instance, would trim the likelihood by half.
While the Fed's monetary policy committee is also meeting in January, the two Goldman economists consider an increase then unlikely.