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Sticking to a script that economists and real estate analysts had long anticipated, outgoing Federal Reserve Chairwoman Janet Yellen Thursday announced a modest benchmark interest rate hike to 1.25 percent-1.50 percent, a move widely perceived as a reflection of confidence in the economy. This is the third such hike in 2017 and sets the stage for what will likely be three or four adjustments in 2018.
The incremental hike, announced at the conclusion of the Central Bank’s two-day Open Market Committee meeting, was supported by all but Chicago Federal Reserve Bank President Charles Evans and Federal Reserve Bank of Minneapolis President Neel Kashkari, who called for rates to stay unchanged.
“In view of realized and expected labor market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to 1-1/4 to 1-1/2 percent,” according to a statement issued following the committee meeting. “The stance of monetary policy remains accommodative, thereby supporting strong labor market conditions and a sustained return to 2 percent inflation.”
“Overall we continue to expect that the economy will expand at a moderate pace,” Yellen said at a press conference following the announcement.
National Association of Realtors Chief Economist Lawrence Yun was cautiously optimistic on Thursday, but raised concerns that the move would likely lift mortgage rates, including the 30-year fixed mortgage rate, in the new year. It currently stands at an average of 3.9 percent and could rise by 25 basis points.
“There will be juice added to the economy in the months ahead as a result of the expected passage of a massive tax cut,” said Yun in a prepared statement. “It remains to be seen whether the effects are long-lasting or just for a short period of time.
However, with the unemployment rate already at a low of around 4 percent, there is not much room to go further down. That means inflationary pressure will slowly develop. That is why the Federal Reserve today raised the short-term interest rates and will likely do so three more times in 2018.
“The longer-term interest rates, like the 30-year fixed mortgages rate, will therefore be nudged higher in 2018. Economic stimulus will help with job creation and housing demand, but higher interest rates threaten to cut into housing affordability in 2018.”
Nominated by President Barack Obama to succeed Ben Bernanke in 2014, Yellen helped guide a fragile economy following the Great Recession by deploying fewer interest rate hikes than many of her predecessors as an emollient against high unemployment at the time.
Yellen’s likely successor, Jerome Powell, a member of the Federal Reserve’s Board of Governors since 2012, is expected to be confirmed by the Senate and take the helm as the Central Banks’ 16th chairperson upon her retirement from the Fed on Feb. 3. He is largely viewed as a moderate who would carry on Yellen’s legacy of moderate rate increases while favoring legislation that would roll back post-2008 banking regulations.
“We don’t anticipate dramatic changes in rates in the near term barring discontinuity in Federal Reserve policy resulting from the change in leadership set to take place next year,” said Ruben Gonzalez, an economist at Keller Williams, who said the increase was “well-communicated to markets” leading up to Thursday’s well-received announcement.
If he is confirmed by the Senate, Powell will become the first Fed chair in four decades without a degree in economics. Prior to joining the Board of Governors, he served as a clerk in the United States Court of Appeals for the Second Circuit in New York before diving into private practice at the investment bank Dillon, Read & Co. and, a decade later, the Carlyle Group. Along the way, he was appointed to the Treasury Department by President George W. Bush and worked at several other high-profile private investment firms before being nominated in 2012 to the Fed.
Upon his nomination in November, Matthew Gardner, chief economist of Windermere Real Estate, told Inman News that Powell’s continuity of vision would likely be a strength, but also warned that Powell’s ties to Wall Street could be cause for alarm.
“It’s probably as good a choice as housing advocates could have expected to get from this administration,” said Gardner. “He’s a fiscal dove, he has an interest in not raising interest rates rapidly. He’ll travel the same line as Janet Yellen in terms of raising rates — but not too quickly.”
“He’s got very close ties to Wall Street, and that is a bit of a concern,” added Gardner. “However, on the other hand, he’s on record as pushing back on proposals to allow banks to increase their leverage, which is actually a good thing, that he supports not allowing that.”
Article image credited to Jacob Creswick / Unsplash