6 questions affecting your money in 2016

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The first draft of financial history for 2015 is nearly written. The Federal Reserve raised interest rates for the first time in nearly a decade as the job market continued to heal. Inflation remained a virtual no-show, with oil prices sliding down the sharp slope of the faltering global economy.

For 2016, we know what some of the key questions are, but the answers will become apparent only with passage of time. As look into the crystal ball wondering about the year ahead, here are some of the biggest mysteries now looming. Many are questions also being asked of and by the nation’s central bank.

  1. How many times will the Fed raise interest rates? The Federal Reserve finally pulled the trigger. Chair Janet Yellen and her colleagues on the Federal Open Market Committee have preached that a more important issue than the initial rate hike is the path of interest rates in the future. They hope to keep them low — or “accommodative,” in “Fed speak — to encourage further growth, fuel job market gains and even lift inflation closer to the Fed’s 2% target. If they’re successful, the availability of credit should actually improve, although that might seem counterintuitive. “Access to credit will increase I think fairly dramatically over the next year. And we’ve already seen solicitations of credit cards and solicitations for home equity lines of credit pick up,” Diane Swonk, chief economist at Mesirow Financial, tells Bankrate. Many Americans have focused on paying down debt since the financial crisis and Great Recession. Some of these consumers may remain cautious about getting in too far over their heads, financially, to avoid the risks associated with credit overload.
  2. Will pay raises become more common? We’ve seen some signs that this is happening, but it hasn’t been enough to spur a broad jump in consumer spending. The nation’s unemployment rate has stood at the historically low level of 5% over the past couple of months, and the Labor Department says average hourly earnings have risen more than 2% — still shy of surges in past recoveries. Economist Ryan Sweet with Moody’s Analytics says, “The economy will likely be at full employment by next summer and, with slack diminishing, businesses are having a harder time finding qualified workers for open positions. Firms recognize this and are planning to raise compensation.” Just don’t spend the money yet.  Sean Snaith, director of the University of Central Florida’s Institute for Economic Competitiveness, agrees that stagnant wages have been a big issue that could do a lot of good if resolved. “The biggest missing link in this recovery has been strong wage and salary growth,” he says. “If that returns in 2016 this will help boost consumer spending in a far more meaningful way than cheap gasoline could ever do.”
  3. Can we expect a long-awaited resurgence in inflation? Coinciding with the pay raises issue is the matter of broader inflation pressure, or the lack thereof. As Alan MacEachin, corporate economist with Navy Federal, puts it: “The big issue I’m looking to be resolved in 2016 is whether wage growth can continue to accelerate and help drive core inflation higher.” When pressed by a reporter on how much inflation is needed to bring about further rate increases, Chair Yellen refused to be pin down. “I’m not going to give you a simple formula for what we need to see on the inflation front in order to raise rates again. We’ll also be looking at the path of employment as well as the path for inflation,” Yellen said at her Dec. 16 news conference.
  4. Will the U.S. economy slow down or remain on its recent path? Annual U.S. economic growth has been relatively steady in recent times, defying the downdrafts from abroad and the slump in oil and other commodities prices. Chair Yellen recently referred to growth averaging 2.25% in the first 3 quarters of 2015, while our own quarterly survey of economists suggests growth should be slightly stronger over the next year. The average among those responding to the Bankrate Economic Indicator calls for growth of 2.5% in 2016.
  5. Are the declines in the prices of oil and other commodities telling us something more serious is in the offing? As consumers, many of us rejoice that gasoline prices have dropped sharply. But when and if a drop in commodities prices reflects substantial weakness in economies, that’s not a good thing. This is the quandary weighing heavily on the mind of veteran investor and economist Hugh Johnson, chairman and chief investment officer of Hugh Johnson Advisors. “Since May, commodities prices have declined 27% and oil prices have declined 42%,” he notes, adding that he wonders whether “the slowdown in China is being transmitted around the globe.” Johnson says he doesn’t think the U.S. will be surprised by a recession. But he says the recent retrenchment in the U.S. stock market suggests “we need to take this question more seriously.”
  6. What will the outcome of the 2016 elections mean to our financial lives? Amid divided government in recent years (and even in times when the divisions weren’t so pronounced), elected leaders in Washington have mostly punted on long-term financial questions, such as the growing costs of entitlements like Social Security and the projected inability of government to pay for its commitments including the growing national debt. Depending on the outcome of the November general election, lawmakers and the new president will either be in better position to work on long-needed solutions or will remain largely still stalemated on the most difficult questions. A possibly encouraging sign is that new Speaker of the House Paul Ryan helped avoid a government shutdown and forged agreement on a budget and highway funding. But little noticed was that the new $1.1 trillion spending plan added $800 billion to the deficit over the next decade. In other words, with yet another punt, the government’s long-term financial problem just got a bit worse.


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