Local expert says consumer impact largely remains to be seen from Fed rate hike
WASHINGTON-The Federal Reserve raised interest rates by a quarter-point on Wednesday, Dec. 14, and signaled a faster pace of increases in 2017 as the Trump administration takes over with promises to boost growth through tax cuts, spending and der...
WASHINGTON-The Federal Reserve raised interest rates by a quarter-point on Wednesday, Dec. 14, and signaled a faster pace of increases in 2017 as the Trump administration takes over with promises to boost growth through tax cuts, spending and deregulation.
Greg Sweeney, chief investment officer and senior vice president of Fargo's Bell Bank Wealth Management, said while the decision will likely lead to higher rates for savers, its impact on mortgages and other loans remains to be seen.
The rate increase, regarded as a virtual certainty by financial markets in the wake of a string of generally strong economic reports, raised the target federal funds rate 25 basis points to between 0.50 percent and 0.75 percent. Bond yields and the dollar rose after the rate decision while stocks were mixed, with financials and tech the only two sectors to show gains.
"In view of realized and expected labor market conditions and inflation, the committee decided to raise the target range," the central bank's policy-setting committee said in its unanimous statement Wednesday after a two-day meeting, adding job gains have been solid recently and the unemployment rate has declined.
Sweeney said savers will eventually see higher rates, though it likely won't be a full 0.25 percent increase because of market "friction." Borrowers with adjustable-rate loans can likely expect to see the prime rate rise by 0.25 percent on the next loan adjustment date, he said.
What it means for other loans is still up in the air, Sweeney said. The last time the Fed raised rates about a year go, he said, many predicted it would force homebuyers to pay more, but the opposite happened and rates actually decreased 0.5 percent.
"It's too early to tell whether it will be favorable or unfavorable" for homebuyers, he said, adding the 30-year interest rate went down 0.01 percent Wednesday afternoon shortly after the Fed announcement.
Even the overall rate increase-25 basis points-wasn't fully reflected Wednesday in shorter-term loans, with the five-year treasury up by 6 basis points shortly after the decision was announced.
Sweeney said it typically takes nine months for a Fed rate increase to fully show up in economic data, meaning the overall impact of this decision likely won't be known until sometime next year.
"This is not near-term stuff," he said.
More significant in Wednesday's news was a fresh batch of Fed policymaker forecasts that indicated the current once-a-year pace of rate increases will accelerate next year. Markets and the Fed appeared to be close on pricing with Fed futures markets pricing in at least two and possibly three hikes, up from one to two prior to the meeting.
With President-elect Donald Trump planning a simultaneous round of tax cuts and increased spending on infrastructure, central bank policymakers shifted their outlook to one of slightly faster growth, lower unemployment and inflation just under the Fed's 2 percent target.
The Fed's median outlook for rates rose to three quarter-point increases in 2017 from two as of September. That would be followed by another three increases in both 2018 and 2019 before the rate levels off at a long-run "normal" 3.0 percent.
Forum reporter Ryan Johnson contributed to this report