NEW YORK (MainStreet) — With consumer prices at a six-year low and inflation seemingly under control, some financial industry observers say the Federal Reserve won't raise interest rates after all.
A few months ago, before oil prices cratered and U.S. gross domestic product strengthening, the conventional wisdom was that the Fed would hike rates to rein in inflation, but that may not be the case right now.
"There are a few important reasons that the Federal Reserve likely won't raise rates anytime soon," says Andrew Carrillo, a certified financial planner and the founder of Barnett Capital Advisors in Miami. "The economic recovery is based on rising stock and real estate prices cause by low rates. If you take away the low rates, real estate and stocks will be under pressure and hurt the Fed's wealth effect strategy."Read More: Fewer People Made Financial Resolutions, but Here's What You Should Vow Now
Another important reason the Federal Reserve may not raise rates: interest on the national debt. "There's over $3 trillion in debt that matures in the next few years," he says. "The market consensus is that the Fed will raise short-term rates to 2.5% by 2016. But that would increase interest on the national debt up by at least 60% when they would have to roll the debt over and refinance at much higher rates."
Another factor is the declining price of oil, which is trading below $50 per barrel. "Oil prices coming down in the last few months gives the Fed a clear excuse to delay raising rates and to fight their deflation threat," Carrillo says.
Matthew Tuttle, a financial planner at Stamford, Conn.-based Tuttle Tactical Management and author of How Harvard & Yale Beat the Market, says the Fed won't raise rates primarily because the global economy is stuck in a rut. "Also, commodity markets and currency markets are a mess," he says. "Then there is the key issue of the dollar, as interest rates in Europe are low and getting lower. So raising rates now in the U.S. would raise the dollar through the roof."
That all could be enough for the Fed to hold off on raising interest rates until next year, says John Walsh, president of Total Mortgage Services in Milford, Conn.Read More: 5 'Surprising' Financial Predictions for 2015 From a Wall Street Guru
"The recent drop in inflation, global economic headwinds and falling commodity prices make it unlikely that the Fed will begin the process of normalization this year," he says. " Although the employment picture is improving and the economy is adding jobs, there may still be slack in the labor market, as evidenced by the lack of growth in wages."
Walsh also says the Fed needs more time to read the economic tea leaves and calculate how current events could affect the economy. "The Federal Reserve's Open Markets Committee has said many times that any changes to monetary policy will be 'data dependent,' and I think that the risks posed by outside factors will cause the Fed to proceed cautiously," he says. "I believe the risk posed by a weakening global economy will be enough for the Fed to delay the normalization process until sometime in 2016, when we'll have a clearer idea of what the long-term impacts of cheap oil and slowing global growth have on the U.S. economy."
That's good news for mortgage shoppers, who should continue to see lower interest rates through 2015. But it's more bad news for bank savers and investors, who are still mired in an era of low bank savings, checking and certificate of deposit rates. Too bad for them, though, as it looks like "more of the same" on interest rates for the rest of 2015.
— By Brian O'Connell for MainStreet