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Will the Fed Raise Interest Rates in 2021?

By Danny Vena, Jason Hall, and Brian Withers - Feb 3, 2021 at 11:00AM

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Given the ongoing economic recovery, how long will U.S. interest rates stay near zero?

The Federal Reserve announced in late January that it planned to keep its benchmark short-term borrowing rate near zero. The Federal Open Market Committee, which decides on the level of interest rates, cited the pace of the recovery and progress in dispensing vaccinations as contributing to its decision. The Fed also expects interest rates to stay low for some time.

In this video from Motley Fool Live, recorded on Jan. 27, "The Wrap" host Jason Hall and contributors Danny Vena and Brian Withers discuss the state of the economy and when the Fed might boost interest rates.

Jason Hall: Now we're going to do one more round. We're getting a little bit of pointless prognostication. We'll talk about something a little bit different here. Fed, just had his latest round of meetings and issued notes, and the Fed has pledged to keep the current low-interest-rate policy in place, "Even well after the economy has recovered." Here's my question, Dr. Withers, you're going to go first here too, because you're unmuted, will the Fed increase rates in 2021? And if so, or even if not, when do you think the next rate increase is going to happen?

Brian Withers: I think you could potentially see one and we saw one, I'm trying to remember the last time they raised it. They got it off at zero and then it's actually back down to zero again. But "zero interest forever" is not a state that we're going to be in and given potential vaccinations and whatnot coming off and potentially a bump in the economy starting in fall, potentially a great holiday season, it would be closer to the end of the year, if anything. But I would say certainly you're going to see something in the next 12 to 18 months.

Hall: Danny Vena, what do you think here?

Danny Vena: I think maybe folks are underestimating just how long it's going to take for the economy to recover. There are a lot of underlying issues right now. There have been a lot of small businesses in the United States -- that underpin the U.S. economy -- a lot of small businesses have gone out of business.

I agree there's a lot of pent-up demand out there. People are going to want to get out, are going to want to spend money. They're going to want to travel, they're going to want to do a lot of things. But the Fed signaled that they're not going to raise rates until "well after the economy has recovered." I don't think the economy is going to be recovered this year. I think some time in 2022 is the earliest that I would expect to see it. Maybe the earliest at halfway through 2022 and maybe later.

Hall: Yeah. I tend to lean toward Danny's side because I think we've seen an enormous amount of permanent job loss that people are under-appreciating, especially those of us in the investment community. They get so used to seeing so many tech companies grow their revenues 20%, 30%, 40%, 50% percent for one period to the next and forget that in the real world, when you're dealing with businesses, tens of thousands of businesses that are gone they're not just going to call out their employees and said, hey, we're going to get the band back together and everybody shows up next week and the business is back open. I mean, lives have been destroyed. It's going to take a long time. I agree with Danny, it's going to take a long time to fully recreate all of the lost work. 25-basis-point increase one year from now. That's my call. That's my call, I'm going to be very specific. We are going to see a 25-basis-point increase next January.

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