On Wednesday, the Federal Reserve declared its intent to raise short-term interest rates and to continue raising them throughout the year, as part of a more aggressive tactic to drain money from the financial system as economic growth continues.
According to Fed Chairwoman Janet Yellen, the Federal Reserve has “confidence in the robustness of the economy and its resilience to shocks”. Officials have intentions to raise the benchmark rate by a quarter percentage point to between 0.75% and 1%, and plan on two more increases in 2017.
Ms. Janet Yellen indicated that the Fed expects continued improvement from the economy in the next year. Markets reacted very well to Yellen’s remarks, sending stocks and bonds higher. The Dow Jones Industrial Average rose roughly 113 points to 20,950.10, welcoming the news. Meanwhile, the 10-year U.S. Treasury note benchmark yield fell to 2.500% from 2.595% on Tuesday. Keep in mind that though the yield fell, the markets saw higher bond prices.
In this phase of the economic cycle, the central bank is considering the chance that the economy could well exceed forecasts. Interestingly, this wasn’t the case in the recent years; previously, the Fed’s desire to raise rates was stalled by sudden shocks, pointing to possibilities that the market might underperform.
Federal Reserve and the Trump Administration
Investors are also worried about a potential clash between the Fed and the Trump administration. However, Ms. Yellen dismissed these concerns, stating that both parties “would certainly welcome stronger economic growth in the context of price stability.” Ms. Yellen also said that she was pleased with her discussions with Treasury Secretary Steven Mnuchin. “I fully expect to have a strong relationship with Secretary Mnuchin,” she remarked.
Interest Rates in Housing
There are mixed thoughts in the housing sector. Some say that rate increases will have little to no impact on home buyers, and the increased optimism generated from the thriving job market will counterbalance increased mortgage payments.
Detractors such as Lou Barnes, a mortgage banker, think it increased rates will force homebuyers to recalibrate to increased payments. “We haven’t had rates above 4.5% for at least five years. No matter how crazy low these rates are, we’re calibrated to it,” said Barnes.
What do you think?
- Think of some things you buy that are affected by interest rates. How do you think increased interest rates will affect you in the future?
- Why is the Federal Reserve raising interest rates? Where do you think the economy will be in a few years?
- Is the Federal Reserve making the right decision by hiking rates? Why or why not?