Yes, investors, interest rates will go up this year.
Here’s the question we really want answered: Will two rate hikes happen before Christmas?
Historically, multiple successive rate hikes have followed a period of prolonged low interest rates. This was the case at the conclusion of the low-rate periods of the early 1990s and mid 2000’s.
“When rates go up, they usually keep going up,” says Nikki Vasco, chief investment officer at FullCapitalStack. “There’s a good chance that the Fed could raise rates this fall, and then again before the end of the year.”
Of course, this most recent period of low interest rates has set new historical standards. With federal funds rates at or near zero since 2009, the Fed is preparing to increase rates from unprecedented territory. Raising interest rates from this point forward will be new frontier.
In a speech in Chicago on Friday, Federal Reserve Chairwoman Janet Yellen remained steadfast in her expectation that the central bank’s Federal Open Market Committee will enact the initial rate increase before the end of the year.
“Based on my outlook, I expect that it will be appropriate at some point later this year to take the first step to raise the federal funds rate and thus begin normalizing monetary policy,” Yellen told the audience at the Chicago City Club. “But I want to emphasize that the course of the economy and inflation remains highly uncertain, and unanticipated developments could delay or accelerate this first step.”
Yellen’s comments were closely followed by U.S. investors, who thought her outlook might change in response to the turmoil in Greece. She mentioned Greece just once in her speech, saying, “Although the economic recovery in the euro area appears to have gained a firmer footing, the situation in Greece remains unresolved.”
The Fed chair said she expects the U.S. employment market to keep improving, with inflation moving closer to its 2 percent target rate. Those expectations are coloring her plans to increase interest rates. She also indicated the Federal Reserve will move slowly and gradually, shaping decisions based on economic realities.
“I currently anticipate that the appropriate pace of normalization will be gradual, and that monetary policy will need to be highly supportive of economic activity for quite some time,” she said. “But, again, both the course of the economy and inflation are uncertain. If progress toward our employment and inflation goals is more rapid than expected, it may be appropriate to remove monetary policy accommodation more quickly. However, if progress toward our goals is slower than anticipated, then the Committee may move more slowly in normalizing policy.”
Reading tealeaves, the fate of rate hikes — and whether or not they’ll happen consistently, or in fits and starts — appears to depend Yellen’s view of economic growth. If U.S. economic growth is believed to be choppy, the rate increase schedule could reflect that. And if growth is steady? There’s a strong chance interest rates will follow suit.