After their two-day meeting concluded on June 14, the Federal Open Market Committee (FOMC) voted to raise the federal funds rate by one-quarter of a percentage point.
This will increase their rate to a target range of 1%-1.25%, meaning the lowest possible interest rate being offered by the Fed will be one percent.
The last time interest rates were so high was in October of 2008.
This is the fourth time the Fed has increased their interest rate in the past decade, and the third time in the past year.
Coming into this meeting, there were mixed signs pointing to whether or not the Fed was actually going to raise their rates. Economic indicators were both positive and negative, depending on what part of the market you looked out.
However, it seems that the Fed believed the positive indicators outweighed the negative.
One area that the Fed saw a particularly strong amount of growth was employment. In their statement, the Fed mentioned that “job gains have moderated but have been solid, on average, since the beginning of the year.”
In May, the unemployment rate hit its lowest level since 2001.
The main issue home buyers will have with this decision is that it is likely going to push mortgage rates slightly higher. But current rates are still ultra-low, and last week saw the lowest rates of 2017.
Mortgage rates might not have increased by much yet, but they should be rising soon.
Why The Fed Rose Their Rate
The 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 June 13-14.
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. Recently, they have been raising their rate to try and spur a quicker growth in the economy. When the economy is growing, higher rates will help monitor the economy.
One reason for higher rates is that it makes it easier for people to earn money on savings. For people that are planning on buying a home at some point in the future, this can help them get the funds they need to purchase a house.
While higher interest rates can have a largely positive effect on most markets, one group of people that tend to get hurt from higher rates are home buyers.
All forms of interest rates are tied to the Fed since they set what is essentially the lowest possible interest rate. They lend money at their rate, and lenders have to mark up rates to be able to stay in business.
The higher the Fed sets their rate, the higher banks and lenders can set theirs.
For home buyers, this all but ensures higher mortgage rates down the road.
On the brighter side, current mortgage rates are still fairly low. It will take time for the economy to adjust to the Fed’s most recent rate hike, and mortgage rates are no exception.
Also, as the economy continues to grow, the average wage rate will rise, as will the number of jobs available. There are plenty of ways that homes can become more easily affordable despite the increase in interest rates.
Next Rate Hike Could Take A While
Coming into 2017, the Fed made it clear that they planned on raising their rate as many as three times before the end of the year.
After this most recent rate hike, the Fed has already increased their rates twice in 2017. This leaves room for another rate hike, assuming the Fed doesn’t change their plan.
The next rate hike could happen in September, November or December, the three final meetings they have this year. Of course, there’s always the chance that the Fed decides not to raise their rate.
As things currently stand, a rate hike in September seems unlikely. For home buyers, this means that lower mortgage rates could hold for a bit longer. This is good news considering the housing market is currently in the busy summer buying season.
The lower mortgage rates stay, the easier it is to afford a home.
By the end of the year, mortgage rates will probably be closer to what they were back toward the end of 2016, assuming there isn’t any major news that shakes the economy.
This could end up being one of the final times in 2017 that home buyers can take advantage of low mortgage rates.
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.