The Federal Reserve last week increased its benchmark interest rate .25%, and clearly is anticipating more economic growth this year and next year. The latest increase takes the benchmark rate from 2% to 2.25%. It has not been this high since April 2008. It is the 8th increase since the Fed started to increase rates at the end of 2015.
The funds rate is very important for consumers because it is the baseline for many types of consumer debt, as well as savings accounts and CD’s. The funds rate increase is felt right away as the prime rate increases as will credit card charges. However, how it is felt in other areas is usually slower, such as mortgage rates.
With the latest increase, the Fed also said that it will likely have one more increase in 2018 and three in 2019.
The Fed had kept the target rate around zero from December 2008 until the hiking cycle that began in 2015. It did this as an effort to bring the US economy out of a serious slump. Since then, the Federal Reserve has been trying to normalize fiscal policy with gradual increases in interest rates.
As rates have continued to rise, so has the outlook for the US economy. The estimate for GDP for all of 2018 has been upgraded to 3.1%, which is an increase from 2.8% that was estimated in June. The forecast for 2019 is .1% higher to 2.5%, while the estimate for 2020 is 2%. The unemployment rate is at near an all-time low at 3.7%.
All of this relatively strong economic news means that in the long term, mortgage interest rates are continuing to increase. As of early October 2018, rates for conventional 30-year fixed mortgages are 4.7%. Yes, mortgage rates for first time home buyers have gone up dramatically from a year ago when they were 3.85%. The reality is that the rates have inched up for everyone.
While higher mortgage rates can make it more difficult for some Americans to buy home, higher rates generally indicate a stronger economy. It is possible that if Trump continues to push trade wars with China and other countries, it could rile the global financial markets and lead to interest rate declines again. But as of today, rates have continued their slow rise. Some financial experts believe that rates will hit 5% in 2019.
As for President Trump, he has actually had some critical words for the Federal Reserve raising rates in 2018. In July, he said that while he had put a good man in as chairman of the Federal Reserve, he did not necessarily agree with the increase in interest rates. It is unusual for a sitting president to say anything negative about the Federal Reserve. At the time the comments were made, the White House defended the remarks, noting that the president has great respect for the independence of the Fed.
Trump has made tweets noting that the rate hikes will cause the dollar to strengthen, and this will increase the trade deficit. But some experts in the markets note that Trump has done things that will push up the trade deficit, such as signing a tax cut financed by debt, and by cutting corporate tax rates. Also, the trade wars he has started has caused foreign currencies to go down, making it more expensive for China to buy our products.
The president said at the time of his remarks that he would have said the same thing if he were a private citizen. Trump said that he did not like all of the work that he and his administration had put into the economy, and then he saw rates going higher.
If you are a first-time home buyer and the average rate of 30-year mortgages at 4.75% is giving you pause, you may want to look at adjustable rate mortgages that can still be obtained in the low 4% range. An ARM can be a smart choice if you think you are going to own the home for only a few years. You can have a low fixed rate for three, five or seven years, and then the rate will reset at market rates.
References: https://www.foxbusiness.com/economy/trump-criticizes-federal-reserve-over-interest-rate-hikes , https://www.mgriffithinc.com/news/industry/news-story/federal-reserve-increase/ and https://www.cnbc.com/2018/09/26/fed-hikes-rates-by-a-quarter-point.html