Steady as she goes. That’s the headline out of the most recent meeting of the Federal Reserve’s Open Market Committee, which ended earlier this month with little surprise or fanfare. The FOMC, the chief policymaking body of the Fed that holds sway over much of the global economy, elected not to raise its key interest rate, the federal funds rate. The committee also reaffirmed its expectation to continue on its previously planned course toward more incremental rate hikes for the rest of the year.
The FOMC’s decisions shape the market for debt, and thus the interest consumers pay on loans including mortgages. But since the Fed’s decision in May to hold steady was widely predicted among analysts, the meeting did not have a significant immediate impact on consumer interest rates. Freddie Mac’s weekly Primary Mortgage Market Survey even found that average mortgage interest rates dipped slightly May 3 compared to the previous week. Still, average home loan rates are at their highest point since 2014, a result of markets having priced in the Fed’s rate hikes long before they are actually announced.
For those who keep tabs on the Fed, the May FOMC meeting was business as usual and left little room for speculation. In a poll of economists conducted by CNBC, respondents overwhelmingly predicted that the next interest rate hike would come in June’s FOMC hearing. Based on recent rate increases, this would probably result in a new rate ceiling of 2 percent.
However, experts are more uncertain on how the Fed will behave in the second half of 2018. Economic forecasts released at the May FOMC meeting favor additional rate hikes in the coming months, but exactly how many is still an open question. Some members of the FOMC panel would prefer just one additional rate hike in 2018, while outside analysts tend to favor the possibility for two more rate increases.
Real estate reaction
The takeaway for anyone involved in real estate – whether as buyers, owners or agents – is essentially the same: stay the course. While the Fed’s interest rate changes do result in more expensive home loans, they are carefully planned so as to prevent a rapid uptick in inflation. At the same time, interest rates on mortgages and the Fed’s key rate overall remain low by historical standards. In theory, these relatively low but steadily rising rates should keep the economy growing at the same modest clip. Continuously low rates could risk a spike in inflation that would increase the cost of goods and services. On the flip side, needlessly high rates make it harder for people to invest in long-term growth. Therefore, this delicate balance is something the Fed hopes to maintain as long as it can.
Ultimately, the FOMC’s job is to predict the future of the economy, and even they don’t profess to be any better at it than most. Homeowners and real estate professionals can take a similar approach and focus on their own needs as they plan for the future, and take the necessary steps to achieve their personal financial goals.