Fed Hints at Looming December Rate Hike

The Federal Reserve voted to leave its short-term rates unchanged on Wednesday but it did indicate that a rise to its short-term interest rates is likely on track for later this year.

“The basic message here is U.S. economic performance has been good,” Fed Chairwoman Janet Yellen said at a press conference following the Fed’s two-day policy meeting. “The American people should feel the steps we have taken to normalize monetary policy … are well justified given the very substantial progress we’ve seen in the economy.”

The Fed kept its key rates near zero for seven years. But since 2015, it has gradually raised rates by a quarter of a percentage point four times. Most recently it raised rates in June at a range of between 1 percent and 1.25 percent. Mortgage rates are only loosely tied to the Fed’s short-term rates, but the Fed’s actions do have some influence.

Mortgage rates, for example, have benefited from the Fed’s purchases of more than $1.7 trillion in mortgage-backed securities and rates have been near their lowest levels of the year, according to the Mortgage Bankers Association.

The Federal Reserve indicated after its meeting that it will start next month to unwind its purchases of mortgage-backed securities and U.S. government bonds. But any movements likely will be done so at a gradual pace.

“That means that mortgage rates would rise up only modestly over time,” says Lawrence Yun, the chief economist of the National Association of REALTORS®. “Given the pace of unwinding asset purchases with the fewer rounds of anticipated short-term rate hikes over the next two years, it’s expected that mortgage rates should still remain at historically attractive levels.”

Yun predicts that the 30-year fixed-rate mortgage may rise to slightly above 4 percent by the end of the year, and may reach just 4.7 percent by the end of 2018.

Source: “Fed to Start Paring Holdings, Keeps December Rate Rise on the Table,” The Wall Street Journal (Sept. 20, 2017) [Log-in required] and National Association of REALTORS®