Fed Raises Interest Rate

The rate hike will affect mortgages as well as savings accounts, but the effects are expected to be gradual over the next several years

December 17, 2015
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The big news yesterday was that the Federal Reserve raised short-term interest rates for the first time since 2008. The small increase reflects a careful strategy that is designed to support moderately-paced expansion of the economy recovery, which Fed chairwoman, Janet Yellen, characterized as having "come a long way, although it is not complete." The Fed's action has already caused mortgage rates and interest on savings to climb slightly, but economists say those rates will remain comparatively low in coming years.

According to Jonathan Smoke, chief economist for realtor.com, "the Fed opted to take its time, and its statement made clear that it’s going to stick to a gradual process to guide rates in the future—and mortgage rates will move up even more slowly" (see The Fed Finally Makes Its Move, Cautiously). As for the effect of the rate hike on housing, Smoke says this move should convince consumers that the low-rate era is over. "We think this will influence fence-sitting buyers—and, more important, fence-sitting sellers who intend to buy as well—to act before rates get much higher," Smoke writes.

For a by-the-numbers look at the reason for the Fed's action, a story in The New York Times (see Why the Fed Raised Interest Rates) includes a series of graphs showing how indicators like the unemployment rate, rate of inflation, labor market, GDP, and other factors support the Fed's action.

For those of us who aren't economists and need a refresher on how all of this works, another NYTimes posting includes a short video plus and accompanying story that is both entertaining and informative (see What Happens When the Fed Raises Rates, In One Rube Goldberg Machine).

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