The Federal Reserve voted Wednesday to raise interest rates for the second time this year and indicated that it will step up the pace of interest rate hikes if economic growth continues to boom. It changed its outlook to a total of four likely increases this year. Eight Fed policy makers said they expected four or more quarter-point rate increases for the full year.
“The committee expects that further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the committee’s symmetric 2 percent objective over the medium term,” according to a Fed statement released after Wednesday’s meeting.
The Fed’s decision to increase its benchmark rate on Wednesday was the sixth quarter-point increase in 18 months. In a unanimous vote, its members raised the federal funds target rate to a range of 1.75 percent to 2 percent.
The Fed’s rate is not directly tied to mortgage rates but does tend to have an impact. Lawrence Yun, chief economist of the National Association of REALTORS®, said in a statement that the raise in the Fed’s short-term interest rates will likely have an impact on what borrowers will be paying for mortgages.
“We are still in the middle innings of rising interest rates … mortgage rates will consequently continue to nudge higher,” Yun says. “Fortunately, the economy is strong and wages are rising. If housing supply can be increased through more building, then the negative impact of rising interest rates can be mitigated.”
The course of interest rate hikes will still likely remain gradual, but the Fed is showing a more aggressive stance at tightening its policy. Unemployment fell in May to the level the Fed had originally forecast for the end of the year. U.S. growth is also getting a boost from $1.5 trillion in tax cuts and a $300 billion in federal spending.
“Economic activity has been rising at a solid rate,” the Federal Open Market Committee said in a statement. “Recent data suggest that growth of household spending has picked up, while business fixed investment has continued to grow strongly.”
Source: “Powell Lauds Economy as Fed Nudges Up Interest-Rate Hike Path,” Bloomberg (June 13, 2018)
