The Federal Reserve chose to raise short-term interest rates by 0.25% today. Short-term interest rates those at which banks borrow funds. When these rates go up, we might expect rates things consumers pay for, like mortgages, to go up.
If you’re in the market for a mortgage, I’ve got some good news. The bond market has been anticipating this increase, so it doesn’t seem to be affecting rates negatively at the moment. In fact, in the aftermath of the announcement, rates appear to be getting a little better.
It’s important to note that it’s hard to predict what’s going to happen in the market from moment to moment, let alone one day to the next. If you see a rate you like, don’t wait. Jump on it and lock your rate now. You’ve been given a gift.
The Fed’s official statement is listed below. My comments follow in bold.
Information received since the Federal Open Market Committee (FOMC) met in February indicates that the labor market has continued to strengthen and that economic activity has continued to expand at a moderate pace. Job gains remained solid and the unemployment rate was little changed in recent months. Household spending has continued to rise moderately while business-fixed investment appears to have firmed somewhat. Inflation has increased in recent quarters, moving close to the committee’s 2 percent longer-run objective. Excluding energy and food prices, little changed and continued to run somewhat below 2 percent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed, on balance.
This is the “report card” paragraph where the Fed gives the U.S. economy a grade. They gave the labor market an A-minus, as jobs continue to be created and the unemployment rate remains low. They gave household and business spending a solid B. Inflation got a B-minus, as it’s been rising but not fast enough to scare those cool cats at the Fed. In all, it’s definitely a report card the Fed could put on the refrigerator.
Consistent with its statutory mandate, the committee seeks to foster maximum employment and price stability. The committee expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace, labor market conditions will strengthen somewhat further, and inflation will stabilize around 2 percent over the medium term. Near-term risks to the economic outlook appear roughly balanced. The committee continues to closely monitor inflation indicators and global economic and financial developments.
This is where the Fed tells us that they always try to balance keeping people employed while not letting inflation go up too much. They seem pretty happy with where things are at right now. They think they’ve got those two things in balance. They reassure us by telling us that they will “closely monitor inflation.” Thanks Fed!
In view of realized and expected labor market conditions and inflation, the committee decided to raise the target range for the federal funds rate to 3/4 to 1 percent. The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a sustained return to 2 percent inflation.
This is the “money paragraph” that traders around the world fast forward to. The Fed increased short-term rates again. The federal funds rate (a.k.a. the fed funds rate) increased from 0.75% to 1.0%. This will push up the prime rate and other short-term rates that closely track the fed funds rate. But, it doesn’t necessarily increase longer-term rates – like mortgage rates. In fact, we are in the midst of a super-powerful bond market rally right now and 30-year rates are dropping nicely. This is largely because this statement that you’re reading right now didn’t scare bond traders. Happy bond traders buy bonds. Bond prices go up when traders buy them. When bond prices go up – rates go down. (If you’re curious as to why, here’s more on how the bond market works.) Yay!
In determining the timing and size of future adjustments to the target range for the federal funds rate, the committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, as well as readings on financial and international developments. The committee will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal. The committee expects that economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.
In the last paragraph, the Fed told us what their decision was. In this one, they tell us why. Basically, the Fed will run endless spreadsheets filled with lots of data to monitor the economy. Their expectation is that they will continue to increase short-term rates gradually, but those rates are likely to remain lower than historically usual.
The committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. It anticipates doing so until normalization of the level of the federal funds rate is well underway. This policy, by keeping the Committee’s holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.
The Fed owns a mountain of mortgage bonds (think trillions). They get giant checks every month (I envision someone at the Fed opening an envelope with a multi-billion dollar check in it and then depositing it in an ATM). They are reinvesting those billions that come from mortgage payments back into mortgage bonds. This keeps mortgage rates lower than they otherwise would be. That makes our clients happy. And we’re all happy when our clients are happy.
Voting for the FOMC monetary policy action were: Janet L. Yellen, chair; William C. Dudley, vice chairman; Lael Brainard; Charles L. Evans; Stanley Fischer; Patrick Harker; Robert S. Kaplan; Jerome H. Powell; and Daniel K. Tarullo. Neel Kashkari voted against the action.
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