Today, December 14, 2016, was an important day. Federal Reserve Chair, Janet Yellen, announced that the Federal Reserve unanimously voted to increase the target for the Federal Funds Rate by 0.25% to about 0.5-0.75%. The Federal Open Market Committee meeting was not a surprise for the market. Besides dodging questions about President-elect Donald Trump, Yellen’s press conference cited many reasons for the rate increase. Low unemployment rates (the 4.6% in November unemployment rate is lowest since 2007), household spending increases, and core inflation near the targeted rate of 2%, all point to a healthy economy. But unemployment is down because people have dropped out of the labor market and is not necessarily a reflection of a strong labor market. Nonetheless, the Federal Reserve Board is confident in the health of the economy and has announced three potential rate hikes next year. We don’t know when they will occur or the magnitude at which they will rise. Both of these factors add to increased uncertainty. A quick look at the Fed’s dot plot shows large standard deviations on the potential rate increases, showcasing this uncertainty.
What does that mean for you? The nominal interest rate on your savings account is unlikely to go up by any significant number. Most analysts have suggested moving to higher yield assets such as index funds instead of parking your cash in a savings account. Interest rates on new mortgages are likely to increase and have a real dollar amount on new loans. During rate increases, it is typical to see a temporary pullback in the real estate market as potential new homebuyers become discouraged. This is typically followed by a quick uptick in the market, as potential buyers want to lock in rates as low as possible. Currently, the market thinks there will be a drop in the real estate market due to an increase in interest rates. Big picture, we are looking at a fair amount of uncertainty both with fiscal and monetary policy.
In short, If you are thinking of buying a home this year, this could mean a 1/4% rate increase which increases a monthly payment by around $58/month (based on a 400k loan). For those looking to sell a home this year, give us a call to discuss how to properly time the sale and take advantage of the future rate increases.
If you have any questions on how this rate change influences you directly, feel free to ask us about it. We spent half of the day watching the Fed’s decision for a reason!