Yesterday, at our Investment Update presentation for clients, LNWM CIO Gino Perrina highlighted the key issues we see heading into 2016. One of the biggest: How much will the Federal Reserve raise interest rates this year? Gino’s short answer: probably not nearly as much as planned. Today, after its January meeting, the Fed confirmed that it’s taking a wait-and-see attitude about raising rates. The following chart, presented by Gino last night, illustrates the Fed’s predicament.
Take a look at the chart below. The shaded area on the far left side shows the Fed’s plans for rate increases in 2016, totaling 1 percentage point (100 basis points). Right next to that shaded area is what the markets are expecting the Fed to do (based on the pricing of interest rate futures contracts). As you can see, the markets do expect the Fed to raise interest rates in 2016 – but only by 21 basis points – A LOT less than the planned 100 basis points.
Most other major central banks are expected to cut interest rates in 2016, given continued low inflation and slowing growth. The combination of a strong U.S. dollar and cheap oil are creating headwinds for U.S. growth and keeping a lid on inflation, which remains well below the Fed’s 2% target.
A likely outcome, said Gino, is that the Fed will not raise rates nearly as much as it had intended in 2016, the price of oil will stabilize at relatively low levels (until the global oversupply gets absorbed), and the dollar’s gains will be smaller in 2016.