In an expected outcome on Wednesday, the Federal Reserve moved to raise rates, increased in the 2.25-2.5 percent range. The decision is the fourth and final hike of the year.
“The labor market has continued to strengthen and that economic activity has been rising at a strong rate,” according to a Fed statement. “Job gains have been strong, on average, in recent months, and the unemployment rate has remained low. Household spending has continued to grow strongly, while growth of business fixed investment has moderated from its rapid pace earlier in the year. On a 12-month basis, both overall inflation and inflation for items other than food and energy remain near 2 percent. Indicators of longer-term inflation expectations are little changed, on balance.”
With the market’s recent upheaval and threats of a trade war, analysts had debated whether the Fed would follow through on its intent to raise rates.
Economic gains, however, trumped the uncertainty. The labor marketâ€”closely eyed by the Fedâ€”has remained strong, with 3.7 percent unemployment.
With the decision, the Fed indicated it is looking to modify its policy in 2019, which could equal fewer increases throughout the year. Earlier this month, Fannie Mae forecasted interest rates will rise two times in 2019, and in a recent update, The Conference Board, a consumer confidence and economic measurer, predicted rates will rise three times.
According to todayâ€™s Fed statement, “The Committee judges that some further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective over the medium term.”
“There is a disconnect between the gloom and doom environment in financial markets and real economic conditions,” said Gad Levanon, chief economist of The Conference Board, in the update. “Even with the expected slowdown, job growth will be more than enough to continue tightening the labor market, leading to faster wage growth and increased inflation pressure in 2019.”
“The labor market continues to be one of the economy’s high points,” said Doug Duncan, chief economist at Fannie Mae, in the forecast.
“The approach of raising rates sufficiently high to combat the next downturn is in danger of creating the next downturn,” said Yung Ma, chief investment strategist for BMO Wealth Management, in a statement. “The futures market’s projections of 2019 rate hikes is well below the Fed’s projections, even with the Fed’s slight reduction in future rate expectations. We believe that the Fed will ultimately come down closer to the market’s current expectations, but the Fed is going to make this a drawn-out process. The market is going to have to look for stability to come from elsewhereâ€”adding to the pressure on President Trump and President Xi coming to a trade agreement.”
“The Fed considers monetary policy as accommodative for economic growth and prefers to raise short-term interest rates gradually to reduce the degree of economic stimulus coming from low interest rates,” said Dr. Frank Nothaft, chief economist at CoreLogic, in a statement. “The rise in the federal funds target will increase other short-term interest rates, including those that serve as an index for adjustable-rate mortgages and HELOCs.”
“Most data continue to support the conclusion that the economy remains healthy; however, recent market activity and the flattening yield curve seem to be showing some risk to growth,” said Ruben Gonzalez, chief economist at Keller Williams, in a statement. “Any indication by the Federal Reserve for a slower path of rate increases in 2019 is a potential upside to housing in the short term.”
For consumers, a Fed hike indirectly impacts prices, including on gas and groceries, as well as affects borrowing costs, such as car loan rates. The exception is home loansâ€”generally, interest on mortgages moves with treasury yields. The average 30-year mortgage rate has waffled under 5 percent for the year, but economists are expecting it to further increase in 2019, climbing as high as 5.8 percent.
“National mortgage rates will have little impact from today’s Federal Reserve one-quarter point increase because the fed funds rate exerts only an indirect influence on mortgage rates,” said Ward Morrison, president of Motto Franchising, LLC, in a statement released today. “Mortgage rates are more closely tied to the 10-year treasury yield, which has been trending down recently, not up. What’s more important is that mortgage rates near 5 percent are still historically cheap compared to the long-term average U.S. national 30-year mortgage rate between 1972 and November of 2018 of 8.09 percent, according to Freddie Mac’s data.Â We believe mortgage rates and home prices will continue to fluctuate in the coming months; however, this will not diminish individuals and families from wanting homeownership or their need for a mortgage.”
With affordability hit by increasing interest rates, home sales have stagnatedâ€”in November, activity fell 7 percent year-over-year, according to the National Association of REALTORSÂ® (NAR), and had been on a six-month slide.
According to Gonzalez, there could be breakthrough if the Fed lets up, and mortgage rates retreat.
“There is the possibility for better home sales if the recent trend for declines in interest rates persists into next year, but the greater concern at the moment is if we see some meaningful change in near-term economic growth forecasts,” Gonzalez said. “This would likely mean more substantial slowing in home sales over the next two years.”
The Fed began increasing interest rates in 2015, and will again determine whether to hike or hold rates this spring.
This story has been updated.