The Fed Rate Hike and Our Future

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Fed Raises Rates Again

Dear Clients:

As expected the Feds raised short-term rates again today, for the third time this year. Based on their most recent statement, the markets expect one more Fed rate rise of .25% in December, when they meet again. And the current estimates are for another three increases spread out over 2019 and a final one possibly in 2020, before they take the “pedal off the metal.” It is the current Fed belief that the economy will remain strong up to three more years from now as unemployment is at 3.9% and GDP is above 3.0%. Consumer confidence and sentiment are high.

What does this all mean for mortgage rates. Unfortunately, they have hit a new seven year high recently. Inflation is still in the Fed’s comfort zone, however, it is the fear of it reigniting that causes their caution with it. The stock market continues to do well, taking investment dollars away from the bond and mortgage backed securities market. Countering these negative pressures on mortgage rates is the fact that the demand for loans is dropping, which will help keep “a lid” on mortgage rates rising too far. For now, expect to see long term mortgage rates hovering close to the 5.0% mark.

Most pundits see an inevitable recession coming in the near future, 1-3 years away, depending on who you listen to. If and when that comes, there will be pressure for rates to drop in order to re-stimulate the economy, and we will begin the cycle of rates dropping down again most likely. For now, home borrowers should be seriously considering the short-term ARMs (i.e., the 5/1, 7/1, and 10/1 ARM’s) that have lower rates than the long-term fixed rate loans. If history holds true, they won’t have these loans for 5,7, or 10 years, before they pay them off with a new refinance at a lower rate. – Ken Thayer, President of Residential First Capital

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