Fed Raises Interest Rates, Hints More to Come

The Federal Reserve voted Wednesday to increase its benchmark interest rate by one-quarter of a percentage point, marking the fourth hike in a year and indicating that more increases are likely to come in 2018. Though mortgage rates aren’t directly tied to the Fed’s benchmark interest rate, they are often influenced by it.

Economists had predicted the Fed’s move, and they say it likely won’t cause waves in the housing market. “We believe the rate increase was well-communicated to markets and had been anticipated,” Ruben Gonzaelz, an economist for Keller Williams Realty, told HousingWire. Fed officials appear to be sticking to their plan to call for three rate hikes in 2018. But interest rates remain historically low, even as the Fed has raised its benchmark rate five times since late 2015.

The Fed said in a statement that it was upbeat about the economy’s performance, adding that the labor market has “continued to strengthen, and economic activity has been rising at a solid rate. The Committee expects that economic conditions will evolve in a manner that will warrant 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, the Committee added.

Lawrence Yun, chief economist for the National Association of REALTORS®, predicts the economy will see an uptick in the coming months.

“There will be juice added to the economy in the months ahead as a result of the expected passage of a massive tax cut,” says Yun. “It remains to be seen whether the effects are long-lasting or just for a short period of time. However, with the unemployment rate already at a low of around 4 percent, there is not much room to go further down. That means inflationary pressure will slowly develop. That is why the Federal Reserve today raised the short-term interest rates and will likely do so three more times in 2018. The longer-term interest rates, like the 30-year fixed mortgages rate, will therefore be nudged higher in 2018. Economic stimulus will help with job creation and housing demand, but higher interest rates threaten to cut into housing affordability in 2018.”

Jerome Powell, governor of the Fed, will take the reins of the Federal Reserve from Chairwoman Janet Yellen in early February. Powell is largely expected to continue to follow Yellen’s plan for gradual rate increases.

Source: “Fed Lifts Interest Rates But Sticks to Go-Slow Approach as Yellen Era Nears End,” MarketWatch (Dec. 13, 2017) and “Fed Raises Rates with Expectation Economy Will Improve Next Year,” HousingWire (Dec. 13, 2017)

Courtesy National Association of REALTORS