Will interest rates rise? We asked local economic experts

Three months ago, the Federal Reserve Board said no to raising interest rates after a rocky global economy gave the central bank pause.

The Federal Reserve System Board of Governors met Tuesday and will meet again Wednesday for its scheduled policy meeting.

Among the factors to be weighed is whether the economy can handle higher interest rates and this time, local experts think a rate hike will get the green light.

After the economic downturn of 2007-08, the Federal Reserve took emergency measures such as reducing the federal funds borrowing rate to near zero, which in turn lowered borrowing costs for homeowners, business owners and others.

Local economic experts responded to email questions from this news outlet asking: Do you expect the Federal Reserve to hike rates this time or not and why? The responses were unanimous — five out of five — that the hike is coming.

When we asked the same experts the same thing in September, four of the seven who said yes were proved wrong. But one thing that’s changed since September is a stronger jobs report. National unemployment now sits at about 5 percent, down from a year ago and down a fraction of a percent from September, according to the Bureau of Labor Statistics.

Jim Russell, principal and portfolio manager, Bahl & Gaynor, Cincinnati investment advisory firm:

Yes. “We believe the Fed will increase the Fed Funds Rate.. by 0.25 percent on Wednesday.”

“The current Fed rate policy is still an “emergency” policy or response to the financial crisis and the very low growth rates and inflation trends that crisis brought. With a (gross domestic product) growth rate in the 2 to 2.50 percent range now and with unemployment at 5 percent, the Fed believes an emergency monetary policy is no longer needed.”

Marc Poitras, associate professor in economics, University of Dayton:

Yes. “At this point the markets seem to be expecting an increase, so to accommodate that expectation, the Fed will go along with an increase, but will offer only a minimal dosage: 25 basis points.”

Jeffrey Korzenik, chief investment strategist, Fifth Third Bank, Cincinnati:

Yes. “We expect the Fed to hike interest rates but to couch the move in extremely “dovish” language, emphasizing that there is no predestined path to normalizing interest rates, the Fed will move gradually so it can assess any impact along the way, and will continue to be data-driven in making its decisions.”

Gus Faucher, senior economist, The PNC Financial Services Group, Pittsburgh:

Yes. “The Federal Open Market Committee is “expected to raise the federal funds target … by 0.25 percentage point, from a range of 0-0.25 percent, to a range of 0.25-0.50 percent. The FOMC is also expected to increase the rate paid on excess reserves banks deposit at the Fed by 0.25 percentage point, from 0.25 percent to 0.50 percent.”

“PNC economists forecast a slow, more deliberate pace of ascent.”

George Mokrzan, economics director, Huntington Bank, Columbus:

Yes. “The Federal Reserve will probably raise its Fed Funds rate target this coming Wednesday. Our forecast is for a quarter percentage point…”

“This extremely-low emergency level Fed Funds rate is no longer necessary since the U.S. economy has been functioning well overall and is generally well positioned for further economic growth. A somewhat higher Fed Funds rate commences a gradual return to interest rate levels during past economic cycles and gives the Federal Reserve greater flexibility to drop the rate in case it needs to in the future.”

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THREE WAYS THIS MATTERS TO YOU

1. BORROWING COSTS. “What the Fed is determining is the rate banks pay to borrow from each other, which is effectively the price of money. (That) influences — in one way or another — every consumer, business, or government and every financial instrument. Fixed mortgage rates are only loosely connected to the Fed’s action. Adjustable rate mortgages, credit cards, and home equity lines of credit will be more directly affected,” said Greg McBride, chief financial analyst for Bankrate.com.

2. ECONOMIC GROWTH. A rate hike would signal a stronger national economy that can handle it. “We believe that the Fed is, if anything, overdue in starting the rate normalization progress. Zero interest rates were an extraordinary response to an extraordinary environment. While growth continues to be below trend, an extraordinary policy can no longer be justified,” said Jeff Korzenik, chief investment strategist for Fifth Third Bank.

“We continue to maintain that the economy will move forward on labor market gains, a strengthening consumer and demographics that favor housing. When these positives are weighted against the risks inherent in excessively low rates, a rate hike is the most prudent path,” Korzenik said.

3. GRADUAL INCREASE. While a rate hike could increase borrowing rates from historical lows, no big jump is expected. “Interest rates — even after Wednesday’s increase — will be very low. Even with the slightly higher rates that Wednesday will bring, the Fed will still be providing stimulus to the U.S. economy. Additionally, the Fed believes they will increase rates only very gradually… over the next few years,” said Cincinnati money manager Jim Russell.