Fed raises rates as expected—now what?

Market UpdateFederal Reserve Chair Janet Yellen and her colleagues voted to raise the key overnight lending rate another quarter percentage on Wednesday, moving the target rate range from .75% – 1.00% to 1.00% – 1.25%. Most analysts had been predicting the hike since the previous increase in mid-March, so equities and bond markets had priced in the news well before it hit.

Last week, mortgage rates were at their lowest levels of the year, perhaps in part due to employment data and mounting distractions in Washington. By Thursday morning, it was evident that the Fed’s decision wasn’t having a drastic impact on the downward trend. Though mortgage rates were slightly higher than last week according to Freddie Mac, the 30-year fixed rateaverage of 3.91% is nearly 40 basis points off its mid-March peak. Over the same time period, the 15-year fixed rate tumbled from 3.50% to 3.18%, and 5/1 ARM rates dropped from 3.28% to 3.15%.*

Looking forward, the Fed has not backed off its forecast to raise rates once more in 2017, though inflation projections will primarily guide them in the eventual decision. Another factor playing into a future increase is the Fed’s hefty $4.5 trillion balance sheet that’s over-stuffed with mortgage-backed securities. The plan is to divest a significant portion of this cache sometime in 2017, and Yellen and friends have to know that markets can’t handle another 25 basis-point rate hike in the midst of a huge sell-off. Good news for the bond market is coming out of China, which recently announced that it would be buying long-term U.S. notes once again after selling a record $200 billion in bonds last year.

Despite the current political environment in Washington, the stock market continues to soar and investors remain undeterred. The prospect of a comprehensive tax reform that was priced into the market after the election is likely at least a year away, but stocks haven’t corrected in response to the uncertainty defining the current administration’s agenda.

Despite the recent rate hike, homebuyers and those looking to refinance would be wise to take advantage of mortgage rates that are still hovering at or near yearly lows.

*FreddieMac.com, “Compilation of Weekly Survey Data”

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