The Federal Reserve raised its key interest rate by 0.25% on Wednesday, December 16, 2015. The Federal Funds Rate now stands at a range of 0.25 to 0.50%.
The announcement comes exactly seven years after the Fed’s last move in any direction, which is when it cut rates to near zero on December 16, 2008.
While rates have not changed in seven years, we have to look back even further for the last rate increase. Rates have been flat or declining even longer than they have been steady.
The Fed’s move today marks the first rate increase since June 2006, nearly a decade ago.
The Fed attributed the rate increase to expanding economic activity and household spending, as well as a solid recovery in the housing market. Inflation is in check and the unemployment rate stands at 5.0%, its lowest level since April 2008 and half its peak level of 10% in 2009.
Fed Calling for Gradual Increases
If investors suspect the Fed will raise rates at future meetings – the next one ending January 27, 2016 – rates could rise a little in anticipation. But nothing drastic.
The Fed funds rate does not directly affect first mortgage rates anyway. Rather, investors take cues from the Fed about the overall interest rate environment. That’s why there is so much commotion around Fed interest rate policy.
The Fed is calling for a gradual increase in rates in 2016 based on economic data as it comes in. Despite small increases, it expects rates to remain historically low for the foreseeable future.
Should Mortgage Shoppers Panic?
If you are looking to buy or refinance in the short term, you should not worry that mortgage rates will rise uncontrollably over the next weeks. Banks and lenders have already priced the rate hike into their rate sheets. Expect only slight increases over coming weeks.
Furthermore, don’t expect the Fed to jack up rates by three or four percent in the first half of 2016. The Fed funds rate should increase by about 0.25% per meeting at the most and there are only eight meetings in all of 2016. The last thing the Federal Reserve wants to do is derail the economic recovery with sky-high rates hikes.
Expect rates to stay very low historically speaking. Keep in mind that the average rate over the past forty plus years is about 8.5%. Mortgage rates in 2016 will most likely stay below 4.5%, suppressed by investors who are not totally convinced of a rock-solid economy.
As investors put their money into safer assets like mortgages, rates will have a hard time rising despite Fed policy.
Mortgage consumers who are not ready to buy or refinance need not panic because they can’t lock in a rate today. Homes and mortgages will be affordable even if a little higher throughout 2016 and beyond.
But for those who are ready, it’s a good time to secure today’s rates before gradual increases in 2016.