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Home | Daily Dose | FOMC: Economy Strong Enough to Raise Interest Rates
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FOMC: Economy Strong Enough to Raise Interest Rates

Federal Reserve farThe Federal Open Market Committee voted Wednesday to raise interest rates for the second time this year to 1-1.25 percent, a move that was widely expected amongst economists and industry professionals and described as “prudent” by FOMC Board of Governors Chair Janet Yellen.

Back in March, they voted to increase the rate a modest quarter of a point to maintain the Fed’s goal of maximum employment and market stability.

The FOMC is of the opinion that waiting too long to scale back accommodations could potentially cause a rapid increase in rates, which could disrupt the market and send the economy into another recession. June’s rate increase reflects this continued belief, and follows Janet Yellen’s comments from March that, “we continue to expect that the ongoing strength of the economy will warrant gradual increases in the federal funds rate to achieve and maintain our objectives.”

It is currently unclear how the hike in interest rates will affect mortgage rates. On Tuesday, Mark Fleming, Chief Economist at First American, stated he didn’t foresee mortgage interest climbing much—if at all—because rates are more closely tied to a 10-year Treasury bond, something that is not really affected by short term rate hikes made by the Fed.

Tom Millon, President and CEO of Capital Markets Cooperative, also believes the Fed's decision will fail to impact mortgage rates. "Since [the] Fed's move was expected, fixed mortgage rates already reflect the higher Fed funds rate. Origination volumes and profits are not at post-Brexit-refi-boom levels, however we are enjoying a solid spring purchase market, and the Fed’s move will not derail that.”

Conversely, Brad Walker, CEO of Income&, thinks it could have a short term effect on mortgage rates.

“We expect to see an increase in mortgage rates in the short term, just as we did with the two previous increases. However, current housing demand and its effect on housing prices can diminish or exacerbate this rise in mortgage rates.”

Rick Sharga, EVP of Tex-X, agrees. "There's some legitimate concern that if the Fed's action triggers increased mortgage interest rates, affordability could become a more significant concern."

What is clear, according to Curt Long, Chief Economist of the National Association of Federally-Insured Credit Unions (NAFCU), is that the Fed’s choice to increase rates is a good sign for the future.

“The actions taken by the Fed reflect confidence in the labor market and a perception that global risks have declined in the first six months of the year,” he said. “Nevertheless, the outlook for the second half is uncertain. Inflation has slowed recently and the debt ceiling debate poses political risk. But with the Fed stating its intentions to start reducing the size of the balance sheet this year, it is offering a clear vote of confidence for the economy.”

In Wednesday’s press conference, and in the previously released addendum to the Policy Normalization Principles and Plans, Yellen confirmed that “changing the target range for the federal funds rate is its primary means of adjusting the stance of monetary policy.” As such, NAFCU is reporting that one more quarter-point rate hike is due in 2017, three are expected for 2018, and three to four are expected in 2019, although the FOMC made it very clear that they are constantly amending their stance as the economy changes, so nothing is set in stone.

The FOMC is scheduled to meet again July 25-26. 

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