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Fed Raised Interest Rates. What does that mean to you?

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Economic Commentary This Week From Our Friends At McLean Mortgage and Troy Toureau, Vice President of Production

The Deed is Done.

The Federal Reserve Board has spoken. The increase of .25% in short-term interest rates surprised absolutely nobody. However, the markets did not like the statement accompanying the increase which alluded to as many as three rate hikes in 2017. Last year they talked about the same thing and we had only one due to several factors. Of course, this year we also have had the “election effect” on the bond market, which means that rates were already moving higher before the move.

When the markets are skittish, any hawkish statement by the Fed was likely to make the markets more volatile, which is exactly what happened. We actually believe that the markets could have reacted poorly if the Fed did not increase rates. This is because the economy has shown enough strength to convince the markets that keeping rates at artificially low levels was no longer necessary. We must remember that the Fed controls short-term rates directly and long-term rates only indirectly. If the markets feel the Fed is being soft against the threat of inflation, the markets will act on their own in this regard.

So, what is the bottom line, now that the deed has been done? The Fed’s announcement after the increase tells us that they are satisfied with the direction of the economy. When the Fed raises rates because the economy is getting stronger, this is certainly good news. The markets are showing further optimism based upon the possibility of new economic policies expected to be implemented by the new Administration. If this optimism turns out to be right, we will see more rate increases in the coming year, which coincides with Chairperson Yellen’s statement. Again, this represents good news for the average American and the housing markets, because more jobs will be created. That would be quite a feat since the economy added over 2 million jobs again this year.

The Weekly Market Update

Rates continued their post-election climb last week to hit another new high for 2016, and the numbers did not reflect the reaction to the Fed raising rates. For the week ending December 15, Freddie Mac announced that 30-year fixed rates rose to 4.16% from 4.13% the week before. The average for 15-year loans increased one tick to 3.37%, and the average for five-year adjustables moved up to 3.19%. A year ago, 30-year fixed rates were at 3.97%, more than 1/8% lower than today’s levels.

Attributed to Sean Becketti, Chief Economist, Freddie Mac — “As was almost-universally expected, the FOMC closed the year with its one-and-only rate hike of 2016. The consensus of the committee points to more rate hikes in 2017. However, the experience of this year, combined with the policy uncertainty that accompanies a new Administration, suggests a wait-and-see outlook. This week’s rate survey was completed prior to the FOMC announcement. The MBA’s Applications Survey posted drops in both refinance and purchase applications, registering the impact of recent rate increases.”

Note: Rates indicated do not include fees and points and are provided for evidence of trends only. They should not be used for comparison purposes.

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