Fed funds rate to reach 1.25% by year-end, CUNA predicts

February 1, 2016

MADISON, Wis. (2/1/16)--Gross domestic product (GDP) growth will climb 2.75% in 2016 and the Federal Reserve will hike interest rates to 1.25% by year’s end, according to CUNA’s Economic Forecast, released Friday.

CUNA’s economists previously had forecast 3% GDP growth for this year, but recent data, including the Commerce Department’s report Friday that GDP growth in the fourth quarter inched higher by only 0.7%, led to the revision. (See related story: U.S. GDP slows to 0.7% growth in 4Q.)

“Despite transitory stock market turmoil in the first three weeks of this year, robust domestic demand in the household and business sectors will continue to spur growth in 2016,” wrote Perc Pineda, CUNA senior economist. “Pressures of the rising U.S. dollar on manufacturing and exports will continue to have some effect on GDP growth.”

The forecast also calls for inflation to rise by 1.75% this year--unchanged from previous estimates--and for the Federal Reserve to raise interest rates at every other meeting in 2016, reaching 1.25% by the end of 2016.

“Federal Reserve actions will continue to be data driven,” Pineda said. “Rising output, tighter labor markets, and higher inflation in 2016 will cause the (Federal Open Market Committee) to continue monetary policy normalization. We expect a 25-basis-point increase every other FOMC meeting in 2016 from the current 0.25% to 0.5% range set in December.”

CUNA’s economists also expect the 10-year Treasury interest rate to climb modestly to 2.5% by December of this year, “which is still about 1.5 percentage points below what we might expect given the condition of the U.S. economy, but geopolitical uncertainty will continue to overrule domestic financial considerations.”