The speculation will end. Almost. While most everybody is expecting an increase in short-term rates by the Federal Reserve Board’s Open Market Committee, there are two questions that remain. First, by how much will the Fed raise rates? If you have asked this question just a month ago, the prevalent answer would have been 0.25%. But with rates going up sharply since the election, the question should be asked whether the Fed will make a move of 0.5%. While the current evidence of inflation does not seem to warrant such an increase, the reaction of the markets to the election leaves the door open for a larger move without shocking the markets.
The second question is–where does the Fed lead us from here? While a rate increase will not come as a shock, the Fed can still roil the markets with incendiary language attached to their post meeting announcement. Or they can calm the markets down with assuring verbiage instead. That calm statement could help rates ease a bit. As we have said many times, the words of the organization can be much more important than their actions, especially when the actions are expected.
Keep in mind that the Fed is reacting to economic numbers, not an election. As Janet Yellen reminded everyone after the election, though the chairperson is appointed by the President, she cannot be removed by the President and she is intending to serve out her full four-year term. Therefore, the jobs numbers released earlier this month should theoretically carry more weight than the rate spike since the election. One should remember that the rate spike is more a function of speculation as to what the new Administration will do, not what has already taken place. Of course, it is not unusual for markets to react to speculation.
The Weekly Market Update
Rates continued their post-election climb last week to hit a new high for 2016. For the week ending December 8, Freddie Mac announced that 30-year fixed rates rose to 4.13% from 4.08% the week before. The average for 15-year loans increased to 3.36%, and the average for five-year adjustables moved up to 3.17%. A year ago, 30-year fixed rates were at 3.95%, more than 1/8% lower than today’s levels.
Attributed to Sean Becketti, Chief Economist, Freddie Mac — “The 10-year Treasury yield dipped this week following the release of the Job Openings and Labor Turnover Survey. The rate on 30-year fixed loans rose another 5 basis points to 4.13 percent, starting the month 18 basis points higher than this time last year. As rates continue to climb and the year comes to a close, next week’s FOMC meeting will be the talk of the town with the markets 94 percent certain of a quarter-point-rate hike.”
Note: Rates indicated do not include fees and points and are provided for evidence of trends only. They should not be used for comparison purposes. Source: Rob Rudd, McLeanMortgage
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