The Federal Reserve voted to raise their interest rate after their two-day meeting concluded on March 15.
This was largely expected after the Fed chairwoman Janet Yellen announced a few weeks back that a rate hike would be likely.
Following their two-day meeting, the Fed is now targeting a rate of ¾ to 1 percent. It was just two years ago that the target rate was near 0 percent.
The rate hike follows weeks of positive economic news. After the Fed adjourned from their previous meeting on February 1, they had hinted that a rate hike would come so long as there were positive economic indicators.
Multiple strong job reports paired with a healthy housing market convinced the Fed that the economy is indeed growing at a good pace.
The Fed stated in their press release that “job gains remained solid and the unemployment rate was little changed in recent months.”
The increased number of jobs has been consistent over the past few months, and raising the federal funds rate will likely foster even more economic growth.
Unemployment has been low, so maintaining the current unemployment rate is actually a sign of health.
The Fed’s decision to change rates is big news, and it is more than likely going to have a large effect on mortgage rates over the coming weeks and months.
However, there’s still a chance that mortgage rates are holding low. It takes time for the economy to react to major decisions, so it isn’t likely that mortgage rates will immediately jump to much higher levels.
Why The Fed Raised Rates
The Federal Open Market Committee (FOMC) is in charge of conducting monetary policy in the United States. They meet roughly every six weeks, and their most recent meeting was scheduled for March 14-15.
One tool the Fed uses to conduct monetary policy is the federal funds rate. This is their version of interest rates, and it tends to set interest rates nationwide.
The Fed decides to change their rate for a number of reasons. Currently, they have been raising it to help spur and continue economic growth in the nation. When the economy is doing poorly, they tend to lower rates.
Such was case for this past meeting. The economy is growing, but it can only go so far with historically low interest rates. The Fed noticed this and decided that the economy was healthy enough to get higher rates.
According to their press release, the Fed “expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace.” This means more spending, and more spending leads to more jobs, higher wages and economic growth.
Higher wages and a rise in the number of jobs are huge indicators for home buyers. The stronger the economy is doing, the higher mortgage rates could become.
However, many home buyers may find themselves with higher paying jobs over the next year or so, and this can easily help cover today’s mortgage rates.
Also, today’s rates are still historically low, much like the Fed’s rate. As they continue to raise their rate, mortgage rates will also begin to gradually rise. With more rate hikes expected this year, mortgage rates could be trending upward.
More Rate Hikes Coming
The Fed thinks that the economy is doing well, so they decided that a rate hike would help spur growth.
In fact, they even mentioned that more rate hikes could be on the way if the economy continues down its current path.
In their release, the Fed mentioned that they expect “economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate.’
Fortunately for home buyers, they also mentioned that they don’t expect another rate hike to happen immediately. The Fed’s next scheduled meeting is in May, but there’s no expectation that they’ll raise rates at that point.
The longer the federal funds rate remains where it is, the more time home buyers and refinancers have time to lock in on current rates.
Mortgage rates have already begun to rise with the expectation that the Fed would raise their rate, but they could rise even more. However, mortgage rates will only go so high until the Fed decided to increase the federal funds rate again.
There’s even a chance that mortgage rates could drop during any given day or week.
As the interest rate climbs over the next few years, mortgage rates will gradually begin to rise with them. The past five years have seen some of the lowest mortgage rates in history, so it’s only a matter of time before they rise back to more normal levels.
Rates change throughout the day, and they’ll continue to change each day until the next Fed meeting. Those looking to take advantage of relatively low rates may want to consider locking in on current rates.