It’s been a long, long time – more than nine years ago — since the Federal Reserve raised its federal funds rate. When the group met at the end of September, the members decided that it just wasn’t the right time yet to raise it since there was still so much volatility in financial markets and lots of uncertainty abroad.
During a press-conference after that meeting, Chair Janet Yellen said she continues to expect the rate will be voted on to be raised later this year. Well, the group will be meeting again at the end of October and again Dec. 15-16.
For those of you who don’t know the powers of the Federal Reserve, it is a body created in 1913 to help the nation’s monetary and financial system stay safe, flexible and strong. It also supervises and regulates financial institutions.
The Federal Reserve has kept its benchmark interest rate close to zero for years just to push the economy ahead. The members hope soon that the economy will be healthier that the cost of borrowing can return to higher levels.
What Experts are Saying about a Fed Rate Hike
Experts weigh in on what raising the rates could do and how it will or won’t affect homebuyers or those wanting to refinance:
“No doubt about it if the fed officials raise rates by ¼ percent that it won’t have a tremendous affect on homebuyers,” says Dan Vessely, president of the Iowa Bankers Mortgage Corporation in Johnston. “But if it’s the first of sequential moves to increase it, then that’s a whole different story.”
His personal feeling is that he thinks the feds should raise the rate for one simple reason – “The absolute uncertainty of whether or not they will raise the rate is playing hell on the entire economic outlook. This guessing game is worse than the actual even,” he says.
Vessely feels that others have a valid point to believe that the rate shouldn’t be increased yet.
“Inflation is barely non-existent. Why would you need to raise rates? Another valid point is the economy is still a little fragile, and the unemployment market is steady but not going gain busters,” he explains.
But he feels that even a ¼ percent increase will help the banks by giving them some pricing power to lend more money.
“The increase will give confidence by the federal government in the economy A quarter of a percentage is a small price to pay to accomplish those things – a little more pricing power for banks and a paramount removal of all the angst about raising the rate,” he says.
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When Will the Fed Raise Rates?
Vessely doesn’t think they will do it in October, but he sees it happening possibly in December. Even if the rate is increased, it will have very little short-term effect on any borrowers.
Whatever step the Federal Reserve takes will be small, translating into a move in mortgage rates that is not that much greater than the movement one would see in a given month even without a move by the fed, says Jim Parrott, senior fellow at the Urban Institute in Washington, D.C. He also is owner of Falling Creek Advisors, which provides financial institutions with strategic advice on housing finance issues.
“The underlying economics that would prompt the move would be to improve employment and wages, for instance – are much, much more important and impactful,” he says.
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This CEO Thinks a Rate Hike would be a Bad Idea
Jason van den Brand, CEO of Lenda, an online refinancing company based in San Francisco, believes the Fed will not raise rates and sees it as a bad move if they do.
“Our econony has grown steadily in a low-rate environment post Great Recession, not just for homeowners but for businesses as well,” he says. “In a time when global competition is fiercer than ever, any potential for slowdown in the U.S.A. could be catastrophic.”
He says you can see the growth in America by just looking at your own town.
“See the cranes? See the unemployment rate trending downward?” he explains. “All of this is tied to the cost of money. While there’s not a direct correlation between the Fed raising rates and mortgage interest rates — given how historically high the cost to originate has been for legacy banks and non-banks — it is very likely that if the Fed does decide to raise rates, mortgage interest rates will rise as well.”
That rise in rates won’t happen overnight, but it would certainly occur, he adds. And a rise in mortgage interest rates, even by .25 percent, would definitely slow down buyers’ and homeowners’ ability to secure new loans or refinancing loans.
“Incomes are flat, and home prices are appreciating, so there’s not much wiggle room,” van den Brand says. “Long story short, rates are going up – not if, but when. Housing is the epicenter of our economy. Any slowdown there would send shockwaves to the greater economy, and we simply cannot afford that right now.”