Fed Hikes Rates, Says Economy Is On Solid Ground

Gina Pogol
The Mortgage Reports editor

Fed Meeting: What Happened?

Today’s Fed meeting adjourned at 2:00 PM EDT, and the members increased the Federal Funds Rate.

Their reasoning:

“Job gains have moderated but have been solid, on average, since the beginning of the year, and the unemployment rate has declined. Household spending has picked up in recent months, and business fixed investment has continued to expand. On a 12-month basis, inflation has declined recently and, like the measure excluding food and energy prices, is running somewhat below 2 percent. ”

The Fed’s mandate is to maximize employment and price stability. It uses its control over money markets to achieve this.

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How Does Today’s Fed Meeting Affect You?

At Wednesday’s Fed meeting, the Federal Open Market Committee (FOMC) voted to increase the Fed Funds Rate to a range between 1.0 and 1.25 percent.

That’s still low by historical standards.

Increases to the Federal Funds rate do not change what you’re paying for your mortgage. They also have little effect on long-term loans like mortgages.

However, an interest rate increase does raise the Prime Rate, which is what banks charge their best and most credit-worthy customers. Rates for loans based on the Prime Rate also increase.

That means credit cards, home equity lines of credit (HELOCs), and other variable-rate products will get more expensive. You may be able to head off these increases by refinancing them to a fixed-rate second mortgage or personal loan.

Historical Federal Funds Rates

As recently as 2007, the Federal Funds Rate topped 5%, meaning rates for credit cards, home equity lines of credit, and other consumer credit accounts were at least 400 basis points (4.00%) higher than they are today.

Mortgage rates were past 6%.

Seeking to maintain current growth, the Fed is keeping borrowing costs low across the board with its “no-hike” decision.

But the Fed is data-dependent, it reminded markets. The group’s future moves will depend on the strength of labor markets, and on the pace of inflation within the economy.

The Fed’s mandate is to balance those two forces.

Why The Fed Raised Rates

Currently, labor markets are improving with job gains “solid” in recent months. The economy has now added more than 15 million jobs since 2010.

Job growth may ignite inflationary forces. Wages are ticking up. The Fed might need to increase rates to cool rising price increases within the economy.

The Fed aims at two percent inflation per year. Currently, inflation is running closer to 1.6%.

That could rise quickly, with the current on-fire stock market, rising oil prices, and unemployment at its lowest level since 2007.

The Fed used its statement to identify inflationary threats within the economy and to suggest the direction of future policy (emphasis added):

The Committee continues to expect that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace, and labor market conditions will strengthen somewhat further. Inflation on a 12-month basis is expected to remain somewhat below 2 percent in the near term but to stabilize around the Committee’s 2 percent objective over the medium term. Near-term risks to the economic outlook appear roughly balanced, but the Committee is monitoring inflation developments closely.

In plain English, this says that the Fed will raise the Fed Funds Rate at a speed appropriate to the pace of inflation. Inflation rates are running low, but not alarmingly so. Future hikes will be gradual to lift inflation to the Fed’s target.

Note that monetary policy can take a long while to work its way through the economy — sometimes three quarters or more. A June rate hike, for instance, would not be felt through the economy until 2018.

The Fed is planning ahead.

Verify your new rate (Feb 17th, 2019)

Fed To Start Offloading Mortgage-Rate-Impacting Securities

The June Fed meeting presented no rate-hike surprises.

The post-meeting announcement mentioned indicated that the economy is improving “moderately,” and that the Fed will be keeping a close eye on inflationary pressures.

Consumer spending is strong, and unemployment is at 10-year bests.

However, one “sort of” surprise came out of the meeting.

The Fed will soon discontinue in part reinvesting principal payments on its massive holdings back into new mortgage-backed securities, or MBS.

As mortgages are paid down, cash is freed up on the Fed’s balance sheet. Up until now, the Fed’s policy has been to use that cash to buy more MBS.

That helps mortgage rates by keeping supply down and demand up.

But the Fed is changing its tune.

It will start siphoning off MBS and Treasury holdings by $10 billion per month initially, working its way up to $50 billion per month in one year.

The action will loosen demand, causing rates to rise somewhat.

Reaction to the news was somewhat subdued, thankfully. The Fed had been hinting at this action for some time, so seeing it “in print” didn’t rattle markets.

As a mortgage shopper, it’s still a very good time to lock a rate.

Lenders are now offering 30-year fixed rate VA and FHA mortgages in the low-4s. Conventional loan rates aren’t much higher.

According to Ellie Mae, a software provider that processes millions of applications per year, lenders were issuing loans at the following average rates in April (the most recent data available):

  • Conventional loans: 4.51%
  • FHA loans: 4.36%
  • VA loans: 4.15%

Today’s rates are holding well below the historical average of more than 8%.

What Are Today’s Mortgage Rates?

Mortgage rates remain cheap and the Federal Reserve appears intent on keeping them in check. Markets often change without notice, however. Lock a loan while rates are still low.

Get today’s live mortgage rates now. Your social security number is not required to get started, and all quotes come with access to your live mortgage credit scores.

Verify your new rate (Feb 17th, 2019)