Federal Reserve Raises Short-Term Rates For First Time In Nine Years

For the first time in nine years, the Federal Reserve voted Wednesday to raise short-term interest rates.

Citing that inflation continues to rise steadily and that the labor participation rate continues to improve, the Federal Open Market Committee (FOMC) voted unanimously to increase the central bank's benchmark interest rate by 0.25% to 0.50% from the current rate, which is at or near 0.0%.

The key word in the official policy statement from the FOMC is ‘gradually.’ Fed officials say they will raise rates ‘gradually’ in order to avoid too much market volatility.

‘With gradual adjustments in the stance of monetary policy, economic activity will continue to expand at a moderate pace and labor market indicators will continue to strengthen,’ the Fed says in its statement.

It remains to be seen whether the increase in the federal funds rate will have an impact on mortgage rates. Most analysts and industry watchers say they expect mortgage rates to increase only slightly – and that the increase shouldn't have much impact on the purchase market. The rate hike could, however, have a chilling effect on refinances.

One positive effect of the interest rate hike is that Americans who are considering purchasing a home may have an easier time saving up for a down payment, as interest on savings accounts and certificates of deposit will likely increase.

In its statement, the FOMC says although inflation continues to run below the committee's target of 2.0% due, in part, to falling energy prices – it, nevertheless, expects inflation ‘to rise gradually toward two percent as the labor market improves further and the transitory effects of lower energy prices and other factors dissipate.’

Still, the FOMC warns that should inflation slow or economic conditions start to deteriorate, it will not hesitate to cut the federal funds rate again and return to its former accommodative stance.

‘In light of the current shortfall of inflation from two percent, the committee will carefully monitor actual and expected progress toward its inflation goal,’ the FOMC statement reads. ‘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 a statement, Mike Fratantoni, chief economist and senior vice president for research and industry technology for the Mortgage Bankers Association (MBA), says the association ‘has been projecting a rate increase all year and we have factored rising mortgage rates into our 2016 mortgage finance forecast.’

‘Due to the strength of the economy, we still project 10 percent growth in the purchase market in 2016, despite gradually increasing rates,’ Fratantoni says, adding, however, that total mortgage origination volume will be down next year due to a decrease in refinances.

‘From a mortgage market perspective, as we move forward, it will also be important to carefully monitor the Fed's plans with respect to their balance sheet investment in MBS,’ Fratantoni says.

‘Today's vote signaled confidence in the future growth of the economy,’ he adds. ‘The unemployment rate is at five percent, employment is growing, and core CPI inflation is running at two percent. By any measure, the economy is close to meeting the Fed's targets, and it is time to raise rates above zero.’


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