The Federal Reserve’s D-Day: Interest-Rate Hike Reflects Confidence in the U.S. Economy

Key Points: 

  • The Federal Reserve’s decision to raise interest rates by 25 basis points was well anticipated by the markets and already built into the increases in mortgage rates that have occurred since the election.
  • Currently at 4.16 percent, 30-year, fixed-rate mortgages remain very close to the highest levels in more than two years. But since the rate increase was considered a foregone conclusion, it will unlikely move the markets further past today’s increase.
  • Nevertheless, the Fed suggested that more aggressive action possibly be taken in 2017 than was previously thought, including an intent to raise interest rates by 25 basis points three times over the next year rather than the anticipated two 25 basis-point increases.
  • The more aggressive path is a reflection of stronger economic conditions since the middle of the year — as well as a faster pickup in inflation and a sharp drop in unemployment rates — but also an incorporation of expected fiscal-policy changes by some Fed members. Also, the hike reflects the Fed’s confidence that the economy has proven resilient and will continue to grow “moderately.” Estimates of gross domestic product growth and the U.S. unemployment rate over the next two years have also been revised more favorably.
  • In the meeting’s follow-up interview, Fed Chair Janet Yellen acknowledged that 2017 will be poised with uncertainty and that future action will depend on what policies are put in place and the resulting impacts on the economy.
  • Another note of caution is that President-elect Trump’s appointees generally have no experience with the workings of the government, thus the transition process may be rife with hiccups, and policies may take longer to implement.
  • However, given the Fed’s vote of confidence in the U.S. economy and anticipation of higher inflation, higher mortgage rates will be top of mind for those who have been thinking about buying or selling a home.

December 15, 2016 by Pacific Union