Slowly & Cautiously: Rate Hikes

Next week The Federal Reserve may decide to raise rates. But just what does this mean for increases down the road given the state of our current economy?

Chairwoman of the Federal Reserve Janet Yellen, has reiterated in recent press releases that the economy won’t be able to sustain higher interest rates in the coming years. Officials from the Fed expect to proceed cautiously before raising rates again. Other countries that have tried raising rates in this past decade have since lowered them back. It is the Fed’s belief that the current state of the economy is such that it can sustain a modest raise, if only for the foreseeable future. The median forecast among 17 officials in September showed they expected the rate to reach 1.375% in December 2016 and 2.625% in late 2017. That would put them on track to raise rates four times next year and five times in 2017 (source: Jon Hilsenrath).

CBS News states, "It may seem counterintuitive, but when the Federal Reserve finally gets around to raising interest rates, the impact on mortgage rates should be negligible. After all, the last time the Fed was hiking, from mid-2004 to mid-2006, mortgage rates rose only a small amount, half a percentage point. Federal Reserve Chair Janet Yellen has signaled that the central bank plans to soon boost the federal funds rate -- which banks charge each other to lend funds -- likely at its next meeting in December. After that, she has indicated that the Fed will increase the fed funds rate only gradually, perhaps a quarter-point at a time. But few borrowers realize that the Fed's impact on longer-term rates, such as those for home mortgages, is muted to nil. In fact, "15- and 30-year mortgage rates could as easily go down as up," said Jason Lina, lead advisor at Resource Planning Group in Atlanta."