Fed announces rate hike decision

by Ryan Smith14 Dec 2016
As expected, the Federal Reserve announced today that it would raise its benchmark interest rate by a quarter of a percentage point.

“In view of realized and expected labor market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to 1/2 to 3/4 percent,” the Fed’s policy-making committee said in a statement. “The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a return to 2 percent inflation.”

The move marks the first interest rate hike this year; the Fed last hiked rates in December of 2015. The Fed had tentatively planned on three incremental rate hikes throughout 2016, but planned hikes this year were continually stalled by less-than-stellar economic news.

A rate hike, of course, usually means a corresponding rise in mortgage rates. Just how big a rise is dependent on a couple of factors, according to bond expert Bryan McNee, president of McNeeSolutions.com.

“How much it impacts mortgage rates depends on two things. One is (the Fed’s) the dot-plot chart,” McNee told MPA. “The dot-plot chart indicates from all the members of the FOMC – not just the voting members – what their projections are of what future interest rates will be moving forward. As bond traders, we’ll be looking through that to see, ‘Do the majority of them see two rate hikes, or three or four?’ The more rate hikes we see over two next year, the worse it’ll be for mortgage rates. The fewer that we see, the better. It will mitigate the sell-off.”

But McNee warned that the chart is never really an accurate predictor of future rate increases.

“It’s just people’s projections; it’s not what ever really happens,” he said. “A lot of the dots are from people who have no vote, so they can’t cause a rate hike anyway.”

Ultimately, McNee said, mortgage rates are likely headed up regardless of the Fed’s actions, because traders are already acting in anticipation of President-elect Donald Trump’s economic policies.

“Bond traders have spoken. They’ve been selling off – not because of a perceived rate hike, but because they don’t think they’ll be able to get out at these prices next quarter,” he said. “They expect tax cuts. They expect financial regulatory reform. They expect pro-growth policies. And growth in the economy always equals inflation, and bonds don’t like inflation.”
 
 

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