By Susanne Dwyer
The Federal Reserve acted as expected on Wednesday, increasing the key interest rate one-quarter percentage point for the third time this year. The action concludes a hastened 12 months for the policymaker, which raised the rate in March and June, as well as once in 2016 and once in 2015. It forecasts three rate raises in 2018.
“Hurricane-related disruptions and rebuilding have affected economic activity, employment, and inflation in recent months but have not materially altered the outlook for the national economy,” according to a statement by the Fed. “Consequently, the Committee continues to expect that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market conditions will remain strong. Inflation on a 12‑month basis is expected to remain somewhat below 2 percent in the near term but to stabilize around the Committee’s 2 percent objective over the medium term. Near-term risks to the economic outlook appear roughly balanced, but the Committee is monitoring inflation developments closely.”
The decision follows a healthy November, when the economy generated 228,000 jobs and historically low unemployment. Overall, GDP has made strides this year, despite inflation lolling under 2 percent—the Fed’s target—and wages growing at a meager pace.
The decision is also the last under Chair Janet Yellen, who is departing in February after four years. Jerome Powell, who will assume the chair post after Yellen, has indicated he intends to stay the course, greenlighting increases incrementally, though frequently, in 2018 and 2019.
Any hike, however small, is significant; borrowing costs, including for mortgages, could increase as the rate rises over time. The 30-year, fixed mortgage rate is currently hovering just shy of 4 percent, according to Freddie Mac.
“There will be juice added to the economy in the months ahead as a result of the expected passage of a massive tax cut,” said Lawrence Yun, chief economist of the National Association of REALTORS® (NAR), in a statement. “It remains to be seen whether the effects are long-lasting or just for a short period of time; however, with the unemployment rate already at a low of around 4 percent, there is not much room to go further down. That means inflationary pressure will slowly develop. That is why the Federal Reserve…raised the short-term interest rates and will likely do so three more times in 2018. The longer-term interest rates, like the 30-year, fixed mortgage rate, will therefore be nudged higher in 2018. Economic stimulus will help with job creation and housing demand, but higher interest rates threaten to cut into housing affordability next year.”
“We believe the rate increase was well-communicated to markets and has been anticipated,” says Ruben Gonzalez, economist for Keller Williams. “We expect mortgage rates to remain affordable and to slowly rise in the near term given the anticipated path of Federal Reserve policy and growth. We don’t anticipate dramatic changes in rates in the near term, barring discontinuity in the Federal Reserve policy resulting from the change in leadership set to take place next year.”
Realtor.com® Senior
From:: Finance and Economy
