Keep Calm, It’s Only 25 BPS

12/16/2015

Today marks the end of an era, as the Federal Reserve decided to lift its benchmark interest rate for the first time in nearly a decade. This news garnered endless hours of media attention, but it’s important not to put too much emphasis on the modest adjustment. A 0.25% bump is still very low compared to historical standards and should not derail our current economic expansion. The Fed decided to gradually move the rates this month so that they wouldn’t have to do abrupt tightening in the future that would shock the economy.

What you need to know:

The short-term impact on the housing market will be muted. The higher federal funds rate will marginally increase mortgage rates, but don’t expect a blow to the housing market. In fact, home sales may rise in the short-run as fear of further increases will get buyers off the fence. “If rates rise gradually over the next couple of years as the Fed has suggested, sales for higher priced homes could slow since buyers would need to buy a cheaper home to keep the same monthly payment”, explains Jeff Meyers, President at Meyers Research.

The Fed is confident in the current state of the economy. The unanimous decision by the Fed Chairwomen, Janet Yellen, and the Federal Open Market Committee should be interpreted as a sign that the Fed is confident in the economy. In an interview this afternoon, Yellen notes the economy is expanding at a moderate pace, and the Fed has faith in the fundamentals driving the economy. For example, the labor market is showing more improvements towards the Fed’s objective of full-time employment.

The economy still needs to work through some slack. Even though the Fed believes now is the right time to raise rates supported by economic stability, there is still room for growth. Consider the following:

  • Labor force participation rates and wage growth are sub-par
  • Inflation is below the Fed’s 2% target (Yellen was upfront about their confusion in not creating inflation)
  • Oil and commodity prices are historically low
  • Performance in the manufacturing sector is lackluster

The Fed did a good job communicating their plans to raise short-term rates ahead of today’s announcement. Most of the effects were already priced into the stock, bond, and mortgage markets, and homebuyers had ample warning that change was coming. The Fed made it clear that monetary policy remains accommodative and they will adjust their strategy over time, as needed. Expect to see more rate increases in 2016.

If you have any questions, please contact Ali Wolf, Manager Housing Economics.

Ali Wolf, Manager Housing Economic
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