Fed Raises Rates 0.25%, Longer-Term Policy Unchanged

Citing that the “labor market has continued to strengthen” and that “economic activity has been rising at a solid rate,” the Federal Open Market Committee (FOMC) on Wednesday voted to increase the Fed Funds Rate by 0.25%, to a range of 1.25% to 1.50%, thus setting the stage for potential increases in mortgage interest rates in the months to come.

It was the third rate hike of the year.

In its statement, the FOMC says despite some economic headwinds caused by hurricanes Harvey, Irma and Maria, which struck in Texas, Florida and Puerto Rico, respectively, “job gains have been solid, and the unemployment rate declined further” in the third quarter.

“Household spending has been expanding at a moderate rate, and growth in business fixed investment has picked up in recent quarters,” the committee says in its statement. “On a 12-month basis, both overall inflation and inflation for items other than food and energy have declined this year and are running below two percent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed, on balance.”

FOMC members Charles L. Evans and Neel Kashkari voted to maintain the existing target range for the fed funds rate, while Chairman Janet Yellen, along with Vice Chairman William C. Dudley and members Lael Brainard, Patrick Harker, Robert S. Kaplan, Jerome H. Powell and Randal K. Quarles, all supported the action.

How much mortgage rates will be impacted by the hike is yet to be seen. In a statement, Ruben Gonzalez, economist with real estate agency Keller Williams said the rate increase was “well-communicated to markets and had been anticipated.”

“We expect mortgage rates to remain affordable and to slowly rise in the near term given the anticipated path of Federal Reserve policy and growth,” Gonzalez says. “We don’t anticipate dramatic changes in rates in the near term barring discontinuity in Federal Reserve policy resulting from the change in leadership set to take place next year.”

Despite recent bullish reports in connection with largely positive economic forecasts for 2018, the Fed continues to take a conservative approach to monetary policy. According to the Fed’s “dot plot” chart, the FOMC is anticipated to raise rates three more times in 2018-2019 before reaching a long-run level of 2.8% – unchanged from the last round of forecasts in September.


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