The Federal Reserve will not raise interest rates when the Federal Open Market Committee meet this week, but rates could get hiked by April or June, said Greg McBride, chief financial analyst for Bankrate, the North Palm Beach, Fla.-based financial content company.
When the central bankers held rates steady in January, consumers received a reprieve on their credit cards with variable interest rates and more time to refinance their mortgages.
“The Fed will not raise rates this month,” said McBride. “If the economy stays as it is, they could tee things up for a possible rate hike in April or June.”
The next increase will not likely occur until this summer, said Robert Johnson, president of The American College of Financial Services in Bryn Mawr, Pa.
“There is a high likelihood that the Fed will leave interest rates unchanged at this week’s meeting,” he said. “The interest rate futures markets indicate that the consensus of the market is for the next rate increase to come in June.”
The underlying fundamentals of the U.S. economy have improved with the “settling down of the financial issues in the global markets,” McBride said. The stock market’s extreme volatility in January upset both investors and consumers as oil prices continued to plummet to records lows.
“The Fed will give a nod this week to the improvements they have seen in the economy,” McBride said.
Despite the numerous signs that the economy has improved with the first quarter growth rate occurring faster than the fourth quarter, the Fed will “point to a lack of wage growth as reason not to raise rates,” McBride said. The low oil prices benefits “far more sectors of the economy than it hurts,” he added.
The economic data that was released last week were “good, but not great” because the unemployment rate held at 4.9% and wages fell from the previous month, said Johnson.
“My belief is that the weak wage performance and general global economic weakness will keep Fed from raising rates at March meeting, but the Fed is not unanimous,” he said.
Variable Interest Rates
The delay in raising interest rates have given consumers an extended period to take advantage of the 0% interest rate from credit card companies and refinance mortgages or other types of debt with variable rates.
“The window of opportunity is still open before the Fed continues to raise rates,” McBride said. “Consumers have to have a game plan for their variable rate debt, because that’s where they are most susceptible when rates do go up.”
Interest rates will rise steadily over the foreseeable future, said Johnson. Potential home buyers who are on the fence and considering purchasing will likely find home prices increasing as the economy recovers and mortgage rates rising.
“Buyers would be wise to lock in fixed rate loans at these levels,” he said.
Why the Fed Needs to Raise Rates
One major reason the Fed will need to increase rates is because it gives them the option to lower them in the future if a recession does occur, Johnson said. The current rate is 0.25% and by the end of 2016, the rate will rise to between 0.75% and 1.0%, if the economy continues to demonstrate signs of recovery, he said. The additional rate increases will result in mortgage rates, auto loans and credit card rates rising simultaneously. The 0.25% rate increase equals to a payment of $0.25 for every $100 in debt you owe.
Investors will likely see stock market returns to be lower in an environment where rates are rising, Johnson said.
“The S&P 500 returned 15.2% during falling interest rate environments and only 5.9% during rising rate environments,” he said.
The sectors which perform the best when interest rates go up have historically included the food, consumer products, energy and utilities industries.
“These ‘defensive’ sectors perform better than cyclical firms because people have to eat, put gas in their cars, and heat their homes no matter the economic environment,” Johnson said.