FED RATE RISES 0.25%
Wednesday, for first time in 56 meetings spanning nearly ten years, the Federal Open Market Committee (FOMC) voted to raise the Fed Funds Rate from its target range near 0.00 percent.
The Fed Funds Rate is now 0.25%.
The group also added that additional rate hikes are likely throughout 2016 because the jobs market is showing signs of staying power and business investment is increasing.
The economy may not be without fault, the Fed acknowledged, but the group is keen to get ahead of inflation, which can negatively affect the economy.
Inflation is the devaluation of a currency, which leads to rising prices. The Fed prefers to see inflation running at two percent annually, but it’s been much below that target for the better part of this decade.
The Fed believes that the contributors to low inflation — namely, falling energy and commodity costs — will soon subside and prices will begin climbing.
An increase in the Fed Funds Rate helps the Fed to fight against inflation, and the Fed is looking far into the future.
The Fed statement included the following (emphasis added):
Given the economic outlook, and recognizing the time it takes for policy actions to affect future economic outcomes, the Committee decided to raise the target range for the federal funds rate to 1/4 to 1/2 percent. The stance of monetary policy remains accommodative after this increase, thereby supporting further improvement in labor market conditions and a return to 2 percent inflation.
In plain English, this says that the Fed is doing the absolute minimum to slow the economy. The group is making only an incremental change in the Fed Funds Rate; and it’s keep an otherwise “accommodative” monetary policy.
The Fed wants to see additional labor market gains and believes that inflation rates are still a bit too low.
The statement also show that Fed is aware that changes in monetary policy can take a long while to work their way through the economy — sometimes three quarters or more.
The change in the Fed Funds Rate, therefore, won’t be fully felt by businesses and consumers until sometime in late-2016.
The Fed is planning ahead.
Does the Fed Rate Hike Effect Me?
MORTGAGE RATES EDGING LOWER
A little bit over a year ago, after the group’s October 2014 meeting, Federal Reserve announced the end of its third round of quantitative easing, 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 been slow to rise. This is because the Federal Reserve continues to reinvest in mortgage-backed bonds.
This excerpt from the Fed’s December statement explains it all:
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.
This means that the Fed is continuing to support low mortgage rates nationwide — even though its qualitative easing programs have ended and are retired.
The Fed will keep buying MBS, and interest rates will continue to be suppressed; and, that’s going to be good for consumers.
Mortgage rates have moved lower after the Fed’s December meeting, but based on the central banker’s plan to buy bonds, rates should remain low into the start of 2016, at least.