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The Fed pulls trigger on first rate hike in a year

The Federal Reserve raised the benchmark interest rate by a quarter percent and signaled it may hike rates three times next year with the strengthening economy and possible expansionary economic policies of the Trump administration.  

The Federal Open Market Committee (FOMC) raised the federal funds rate to a range between 0.5 percent to 0.75 percent. This was only the second rate increase in a decade and the first since last December. Fed

Federal Reserve Chair Janet Yellen said the committee members were optimistic about the economy, although she acknowledged that “a cloud of uncertainty” surrounds the impact of the new administration’s economic policies. The Fed's “dot plot” that charts the likely course of the federal funds rate now signals potentially three hikes next year, which is one more than the markets anticipated.  

The Fed's policy makers have revised down the projection for unemployment to 4.5 percent, which is lower than the long-run average. Also, the Fed now expects slightly higher gross domestic product growth; however, inflation remains below the target of 2 percent, and business investment has remained weak.   

The Fed’s action only directly affects the overnight bank borrowing rate, and short-term rates. Yellen said households and firms would see “very modest changes from this decision.”

“It [the rate hike] is a vote of confidence in the economy,” Yellen said during the news conference.

Housing economists are predicting that the 30-year fixed rate will end the year next year in the range of 4.5 percent to 5 percent. Fannie Mae Chief Economist Doug Duncan said the “dot plot” projections seem to indicate a more hawkish stance, but he noted that it once also predicted four rate increases in 2016.

“Much of the upbeat financial data, including the jumps in interest rates, the dollar, and equity prices, are largely due to the anticipation of stronger economic growth from suggested fiscal stimulus and deregulation from the new administration and Congress,” Duncan said.  

“Whether that bullish view will come to fruition hinges on the priorities of the incoming president and the willingness of Congress, as candidate Trump also campaigned on anti-growth trade policy,” Duncan continued. “The Fed will likely be in wait-and-see mode given this substantial policy uncertainty.”

No surprise

The markets widely expected a rate increase in December.  

“I didn’t see any big surprises,” said Kevin Finkel, executive vice president of Resource Real Estate, a real estate investment trust. “We know that the economy is strengthening. In a market like this, we know that rates are going to go up.”

Finkel told Scotsman Guide News that rising rates and strengthening economy could benefit owners of apartment buildings. That’s because rising rates will make homebuying more expensive, and more people may choose to rent. He also said the prospective tenants may have more money in their pocket as wages rise, giving landlords more leverage to raise rents.

“We may be entering into a little bit more of an inflationary period, and that is part of being in a stronger economy, “ Finkel said. “Again, that is good for apartments.”

Mortgage originators who specialize in refinances could be in for a rough ride next year, however. Brian Koss, executive vice president at the Mortgage Network, said forecasts that predict refinancing volume could plunge by 40 percent next year are likely to come to pass. At least initially, however, the home-purchase market could get a boost, if people believe rates will rise.

“This move should continue to get some people off the fence,” Koss told Scotsman Guide News. “That is one reason to jump back into the game a little bit and see what is out there. I think it will be a decent first quarter because of the threat of rates being higher.”  


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