For the first time in a year and only the second time in a decade, the Federal Open Market Committee (FOMC), the policy making arm of the Federal Reserve, voted on Wednesday in its eighth and final meeting of the year to raise the federal funds target rate by 25 basis points up to the 0.50 to 0.75 percent range. Analysts in the housing industry have been speculating for weeks as to what the effect of a Fed rate hike would be on mortgage interest rates and overall affordability. In the month prior to the Fed voting to raise the federal funds target rate, the average 30-year FRM rose by more than 50 basis points to a level above 4 percent for the first time in more than a year.
“While the Fed’s hike of 0.25 point in short-term interest rates may trickle down to long-term rate products like 30-year mortgages, the more immediate impact will be felt by borrowers with variable-rate mortgages and home equity lines of credit who can expect an increase in their payments at their next rate reset,” said Tim Manni, mortgage expert at NerdWallet. “Homebuyers shouldn’t be particularly concerned with today’s Fed move. Even with rates hovering over 4 percent, they’re still historically low.
The Fed released a new forecast Wednesday and it projects U.S. economic growth this year to be 1.9% and next year to be 2.1%, both slightly better than the Fed’s previous projection in September. The rate increase indicate that the U.S. economy no longer needs the Fed’s crutches and consumers and businesses can afford to pay more to borrow.