For the first time since December of 2015, the Fed decided to raise the federal funds rate.
This is only the second time the Fed has raised rates since 2008, and the implications are going to be big – especially for mortgage rates.
The Fed is now setting their target rate at ½ to ¾ a percent, a level that is still relatively low on the historical scale of interest rates. However, the rate hike is bound to set a trend of rising rates across the nation.
The Fed’s decision to raise their rate isn’t a huge surprise since they had committed to raising rates at least once during 2016. This was their last opportunity to do so as they are not scheduled to meet again until next year.
For most people, the Fed’s decision might not seem like much. However, it shows their optimism in the economy which has had a strong year overall. Unemployment is holding low and inflation is returning to the two percent mark that the Fed wants to see.
Economic factors expected to continue to improve, and the Fed is prepared to raise rates at least three times in 2017, assuming the economy continues trending upward.
This could officially mark the end of ultra-low mortgage rates for home buyers and mortgage rate shoppers, but that doesn’t mean rates are going to skyrocket. In fact, any surprising economic news could force rates lower.
Until that happens, those looking for the best rates will want to follow them over the coming days.
Why The Fed Hiked 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 December 13-14.
One of the Fed’s roles is to keep inflation and unemployment at healthy levels, and a tool they can use to influence this is the federal funds rate.
When the economy isn’t doing well, the Fed can lower interest rates to kick start everything. This is what they do during recessions, and they dropped rates to almost 0 percent during the 2007 financial crisis.
Now that the economy is improving, the Fed is once again raising rates because the economy is strong. The Fed saw that “job gains have been solid” and that “the labor market has continued to strengthen,” two major signs that the economy is growing.
A result of higher interest rates is higher rates in general. While this means higher returns on savings accounts, it also means higher mortgage rates.
One important note is that every voting member of the FOMC voted for an increase in rates. Confidence in the market is high.
Fortunately for home buyers, there is no direct correlation between the Fed’s rate and mortgage rates. Mortgage rates will continue to change daily, but they have a better chance of increasing than decreasing after the Fed’s decision.
Rates Set To Rise
Mortgage rates have already been climbing to their highest levels of 2016 over the past month, and the Fed’s decision to raise rates isn’t going to slow them down.
Home buyers can expect rising rates over the next few weeks, but it could be followed by a slight drop in mortgage rates. The market will take some time to adjust to the Fed’s decision, and any changes to mortgage rates could be an overreaction.
At the same time, rates might not jump higher in response to the Fed. Those looking for the lowest rates available will want to check rates daily.
One important thing to note is that the Fed is still committed to purchasing mortgage-backed securities. This will help hold government-backed mortgages at low rates.
Those eligible for FHA loans or VA loans will be getting the best rates available. However, rates for both FHA and VA bound to rise as mortgage rates continue to climb.
For many home buyers, this may seem like a “now or never” decision. But mortgage rates have been near historic-low levels for a while, and a raise in rates won’t deter too many home buyers.
While home buyers might be getting the best rates today, they can still get relatively low rates over the coming months, and possibly well into 2017.
Rates have been rising 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.