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15 <br /> Executive Summary: A Turning Point in the Economy <br /> 2015 represented a turning point for the current economy. After delaying for <br /> several years, the Federal Reserve (the "Fed") finally made their move. They raised their <br /> key interest rate by 0.25% points. If the economy continues to perform according to Fed <br /> expectations, there will likely be several move modest interest rate hikes in 2016, resulting <br /> in a federal funds rate of close to 1% by year's end. Still,with the all-items inflation rate <br /> projected to register 2% for the year, the Fed's key interest rate will remain negative in <br /> "real" (after-inflation) terms, so a "loose" or "stimulative" credit policy will still be <br /> maintained—the policy will simply be slightly less loose and slightly less stimulative. In <br /> short, the Fed is still encouraging borrowing and spending. <br /> With inflation tame and labor markets not yet at full-employment levels,why did <br /> the Fed make their move to raise interest rates? There are three reasons. First, the Fed <br /> wanted to signal their confidence in the economy by implicitly declaring economic growth <br /> can continue even with slightly higher interest rates. Second, the Fed wanted to begin the <br /> slow climb to a federal funds rate eventually in the 3% range, high enough to allow the Fed <br /> to reduce the rate when the next recession hits. Third, the Fed wanted to moderate the <br /> advantages of investing in asset markets —like stocks and real estate— during a historically <br /> low interest rate environment—in order to avert, or at least reduce—the possibility of <br /> "asset bubbles". Asset bubbles are one of the prime causes leading to recessions. <br /> The national economy performed rather well in 2015. Broad economic growth <br /> (GDP)was above the post-recessionary annual average, although growth was well short of <br /> the longer run (1990-2010) annual average. Employment growth was actually above the <br /> long-run average growth rate. Productivity growth was better than the post-recessionary <br /> average but under the long-run average. The housing market made strong—but not stellar <br /> — gains. <br /> The most notable differences for 2015 were for inflation, the household sector, and <br /> the dollar's international value. The all-item's inflation rate was only 0.5%, due largely to <br /> the dramatic drop in oil and gasoline prices. Households solidified their post-recessionary <br /> gains,with a 5.3% gain in real (after-inflation) median household income, reductions in <br /> relative household debt and debt payments, and a continued strong savings rate. The <br /> dollar's international value jumped 25% compared to its post-recessionary average. <br /> Driven by continued gains in the job market, average earnings and income, and— <br /> importantly, household formation —the national economy should continue expanding in <br /> 2016. Real GDP growth will be slightly better at 2.4% - compared to 2.2% in 2015 —jobs <br /> will increase, and the national unemployment (headline) rate will be under 5% by year's <br /> end. The dollar's international value will peak,which will give some steam to exports and <br /> the manufacturing sector. Improved household spending will propel the economy but also <br /> boost debt loads and reduce savings rates. <br /> The biggest change in 2016 will be in the financial sector with the path of short-term <br /> interest rates on the rise. The rise in rates will have several impacts, including moderation <br /> in asset buying, higher interest payments by households, and higher relative interest <br /> 2 <br />