Rate Hike Postponed But Not Cancelled

Interest rates on mortgages moved slightly lower this week ahead of the Thanksgiving holiday. Meanwhile, markets are anticipating a move from the Federal Reserve at next month’s policy-setting meeting. One of the uncertainties that the housing market will face for the rest of the year and the upcoming 2016 is timing and size of the federal funds rate increase. With the economy picking up steam this year and the unemployment rate falling, a rate hike was widely anticipated last month. Instead the Federal Reserve has decided to hold off on raising interest rates. The Fed’s move was not a complete suprise, but there were many that belieed that the economy has improved enough to compel the Fed to raise rates.

 The likelihood of a December rate hike received a bump when, according to Reuters, San Francisco Fed President John Williams said Saturday that as long as economic data continue to be favorable, “there’s a strong case to be made in December to raise rates.” The Fed’s goal is to have stable inflation and full unemployment. Inflation has not been a problem so far. But the labor market is a concern despite the fact that the unemployment rate is approaching the Fed’s goal of full employment. Recent signs of global economic slowdown is the primary reason for not implementing a rate hike.

There is a strong possibility that the Federal Reserve will begin the rate normalization in December. The words “next meeting” were in a sentence about determining whether or not it will be appropriate to raise rates when the Fed meets again. These two words were surrounded by decidedly tempered  economic rationale that said we are not where we need to be and may not be there anytime soon, but the odds makers interpreted “next meeting”  as rate hike ready. In fact, Bloomberg reported that traders had increased the odds for a December rate hike form 37% to 48% following the release of the Fed statement. The odds makers at Goldman Sachs see a 60% chance for a Fed rate hike at the December meeting.

Here’s the thing; if you are buying a house or planning on buying a house, if refinancing your current mortgage is in your near term plans, these Fed rate hike odds makers are playing with your money.  Not because rates are higher, but because market makers are trying to guess when they will be, even when they are wrong. Clearly the markets and market participants want and need interest rates to begin to ascend to real world norms. If the normalization process takes place gradually throughout the next two years, modestly higher interest rates should not present much of a direct challenge for our real estate market which remains strong although signs of cooling trend are begining to appear.