Fed Raises Key Interest Rate
The Federal Reserve announced today that it has raised a key interest rate in response to a strengthening U.S. economy and expectations of higher inflation, and plans three more similar rate hikes in 2017. The Fed’s move was widely expected following a year of favorable economic data and growth, and will mean modestly higher rates on some – but not all – loans.
It’s commonly held by both the Fed and most economists that the U.S. economy has improved sufficiently over the past year (after a rough start to 2016) to be able to withstand slightly higher borrowing rates. In a statement, the central bank said that it’s raising its benchmark rate by a quarter-point to a still-low range of 0.5 percent to 0.75 percent. The Fed last raised the rate last December from a record low of nearly zero, set during the 2008 financial crisis.
The Fed also released an updated economic forecast that showed modest changes to its outlook for economic growth, unemployment and inflation, mainly to take account of stronger growth and a drop in the unemployment rate for November to a nine-year low of 4.6 percent. This further justified its rate hike, the bank said.
Some homeowners as well as buyers and sellers are correct to be conscientious of the effect the rate hike may have on their mortgages or home values. The Fed’s action should have little effect on mortgages or auto and student loans, but rates on some other loans — notably credit cards, home equity loans and adjustable-rate mortgages — will likely rise soon, though only modestly. Those rates are based on benchmarks like banks’ prime rate, which moves in tandem with the Fed’s key rate. As credit gets slightly more expensive in general (the most obvious and tangible effect of the rate hike), mortgages may see a slight increase and lending may tighten just enough to push home values up further in 2017.
Ultimately, if you have a fixed-rate mortgage, you’re probably in good shape as your home’s value continues to grow, which may be by as much as 4 percent in 2017 for some areas. While most areas are projected to follow this trend, some markets that have seen have seen the sharpest price increases during the recovery, such as New York, Los Angeles and Austin, Texas, could see a dip.
Despite today’s rate hike and the predictable “all-aboard-now” frenzy by the market in response, it’s important borrowing costs remain exceptionally modest by historical standards, while the average mortgage payment around the U.S. is still significantly below its level before the housing crash. Buyers that have committed to a home purchase are unlikely to be swayed by the increase in interest rate, which is good news for sellers in the midst of closing a sale.