Fed Says The Case For An Increase Has Strengthened

Posted by Patrick Barnard on September 21, 2016 No Comments

“The case for an increase in the federal funds rate has strengthened,” the Federal Open Market Committee (FOMC) declared in a statement on Wednesday, following its two-day meeting.

However, a sharply divided committee said in a statement that it had decided, “for the time being, to wait for further evidence of continued progress toward its objectives” before raising short-term rates, indicating that the next rate hike could come as soon as December.

Last month, the committee released minutes from its July meeting indicating that it had decided to forgo raising the federal funds rate until the markets recovered from the initial impact of the Brexit vote. Those minutes indicated that the Fed might not raise interest rates until December or sometime next year.

A weaker-than-expected August jobs report probably factored into the committee’s decision not to increase rates this month. However, in its statement, the committee acknowledged that “although the unemployment rate is little changed in recent months, job gains have been solid, on average.”

Meanwhile, inflation is well below the 2% mark that the Fed has been waiting for.

One thing is for certain: If and when the Fed finally does decide to raise rates, it will be incremental – probably increases of 0.25% or less.

“The committee expects that economic conditions will evolve in a manner that will warrant only 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,” the committee said.

Markets reacted positively to the news, with the Dow Jones Industrial Average rising to 18,293.70 by day’s end.

The committee also released its economic projections, which can be accessed here.

The Fed last increased rates in December – the first hike in nearly a decade.

In a statement, Steve Hovland, director of research for HomeUnion, said, “As expected, a divided Federal Open Market Committee maintained extremely accommodative monetary policy, citing concerns about low inflation while monitoring global economic and financial conditions.

“Today’s decision by the Fed places the December meeting squarely in focus for Wall Street, though action could be taken during the early November meeting,” Hovland said. “Without a planned press conference, however, and with a long history of kicking the can down the road, it is unlikely that the Fed will raise rates during a lame duck meeting. The fed sited near-term risks to the economy as balanced, whereas near-term risks were seen as diminished following the last meeting.

“There was a smaller chance of a hike during this year’s late summer meeting compared to last year, when investors were looking for a vote of confidence from the Fed,” he continued. “However, the FOMC was unlikely to place itself in the spotlight ahead of the presidential election in November. Nonetheless, rates are almost certain to move by year-end, barring any catastrophic economic news. The capital markets are expected to lift borrowing costs well ahead of December’s meeting, once again leaving the FOMC catching up to the market rather than setting it. Last year, average mortgage rates drifted up approximately 25 basis points between the September and December meetings.”

Hovland said although a lot of attention is given to Fed policy decisions, it is important to remember that interest rates remain extremely low by historical standards.

“At $281,800, the median price for owner-occupied homes in August, an interest rate increase from Freddie Mac’s most recent weekly survey figure of 3.5 percent to 3.75 percent amounts to a $32 monthly rise for home buyers,” he said. “Leveraged investors, meanwhile, paid a median of $261,900 in August. Monthly mortgage obligations for these investors after a 25-basis-point rate hike would inch up approximately $30 per month. In spite of these minor increases, several upward movements in the federal funds rate will be necessary to impact the investment housing market.”

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