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December 16, 2016
They Finally Did It!
The Fed raised rates…and having done it, apparently may do it again.
The Federal Reserve Open Market Committee (FOMC) ended their monthly meeting on Wednesday with an announcement of a quarter point increase in the federal funds rate. This brings the target for the overnight lending rate between banks–to a range of 0.5% to 0.75%.
It wasn’t the rate increase itself that made the news, but the Fed’s accompanying statement, which was more hawkish than expected. The central bankers said they were looking toward three more quarter-point increases in 2017. They had signaled as recently as last September that there would be two.
Futures traders had put the probability of an increase in December at 100%, but the Fed has pulled back from the brink before, confounding experts who, at the beginning of this year had anticipated two increases in 2016. It was only the second time since 2006 the FOMC has raised rates. They cut them to zero during the recession, trying to get the economy going. The first post-recession increase was at the December 2015 meeting.
In raising the ante for 2017, the Fed cited increased expectations for inflation and indications the labor market is tightening. The subdued rate of inflation this year has often been cited as the reason for holding the rate steady.
Fed Chair Janet Yellen said “This is a very modest adjustment in the path of the federal funds rate.” She called the decision to raise rates “a vote of confidence in the economy.”
The ten-year T-bill rate jumped by 6 basis points in the wake of the announcement and analysts noted that most lenders repriced mortgage interest rates at least once Wednesday afternoon.
The National Association of Homebuilders’ (NAHB’s) Housing Market Index, a measure of builder confidence in new home sales, has drifted for months but posted a strong gain in December, rising 7 points to 70. It was the highest level since 2005. The index component measuring perceptions of buyer traffic has dragged on the index for years even as other components recovered from the recession. This month it crossed the milestone 50 mark for the first time in 11 years.
Freddie Mac and Fannie Mae announced a new foreclosure prevention program that will eventually replace the crisis era Home Affordable Modification Program that expires at the end of this year. “Flex Modification” will enable eligible homeowners who are delinquent on their mortgages to reduce payments by as much as 20%.