Fed Hikes Mortgage Interest Rate, Projects More Increases In 2017
The Federal Reserve raised the Fed Funds Rate at its December 2016 meeting.
Adjourning from a 2-day session, the nation’s central banker voted to increase its key interest rate to a range near 0.50%.
It’s the first hike in 2016, and only the second in a decade.
The decision was unanimous, with all ten voting member voting for the action.
Mortgage rates are rising on the news.
In its post-meeting press statement, the Federal Reserve said that the U.S economy is expanding at a “moderate pace”, with solid job gains since the year’s start, and inflation expected to rise over the “medium term.”
The group projects more frequent hikes in 2017.
Mortgage consumers should consider locking. Rates could be higher tomorrow.
Fed Hikes Benchmark Rate To 0.50%
Wednesday, the Federal Open Market Committee (FOMC) voted to raise the Fed Funds Rate one-quarter percent, to a range near 0.50 percent.
The first hike of 2016 came in response to an unemployment rate near 10-year lows and nearly 2 million jobs created in 2016.
The Fed is data-dependent, it reminded markets. The group’s future moves will depend on the strength of labor markets, and on the pace of inflation within the economy.
The Fed’s “job” is to balance those two forces.
Currently, labor markets are improving with job gains “strong” in November. The economy has now added 15 million jobs since 2010.
Job growth may start to ignite inflationary forces. Wages are ticking up. Soon, the Fed may need to increase rates at a faster pace to cool rising prices in the economy.
The Fed aims for a two percent inflation rate per year. Currently, inflation is running closer to 1.5% and that’s near where it’s been for the better part of this decade.
That could change quickly, with the current on-fire stock market, rising oil prices, and unemployment at its lowest level since 2007.
The Fed used its statement to identify inflationary threats within the economy and to suggest direction of future policy.
The Fed statement included the following (emphasis added):
In light of the current shortfall of inflation from 2 percent, the Committee will carefully monitor actual and expected progress toward its inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.
In plain English, this says that the Fed will raise the Fed Funds Rate at a speed appropriate to the pace of inflation. Inflation rates are running low, but not alarmingly so. Future hikes will be gradual to lift inflation to the Fed’s target.
Note that monetary policy can take a long while to work its way through the economy — sometimes three quarters or more. The December 2015 change to the Fed Funds Rate, then, hasn’t been fully felt by businesses and consumers until recently.
The Fed is planning ahead.
Mortgage Rate Increases Tempered By Cautious Fed
More than two years ago, the Federal Reserve adjourned from its October 2014 meeting and announced the end of its third round of quantitative easing for the economy, a program known as QE3.
QE3 had been running for over two years.
Via QE3, the Federal Reserve purchased $85 billion in long-term bonds monthly, which included a hefty amount of mortgage-backed securities (MBS).
In buying mortgage-backed securities, the Fed boosted aggregate demand which, in turn, caused MBS prices to rise; and, when MBS prices rise, current mortgage rates fall.
The start of QE3 heralded an era of unprecedented low rates and sparked a refinance boom nationwide. HARP 2 loans surged as homeowners flocked to the various streamline refinance programs.
Home purchase activity increased, too.
Today, in many markets, and in large part because of QE3, home values have recovered all of the value lost during last decade’s downturn and they continue to make strong gains.
Since QE3 ended in 2014, though, current mortgage rates have remained below historical norms. This is because the Federal Reserve continues to reinvest in mortgage-backed bonds.
In its December 2016 statement, the Fed said it will continue to support low mortgage rates via re-investment.
The Committee is … reinvesting principal payments from its holdings of … mortgage-backed securities … and it anticipates doing so until normalization of the level of the federal funds rate is well under way. This policy … should help maintain accommodative financial conditions.
The Fed will keep buying MBS, in other words, which will help to keep mortgage rates suppressed for all government-backed loan types, including conventional loans backed by Fannie Mae and Freddie Mac; FHA loans insured by the Federal Housing Administration; and VA loans and USDA loans guaranteed by the Department of Veterans Affairs and U.S. Department of Agriculture, respectively.
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Source The Mortgage Reports
