The Fed Is In No Hurry to Raise Rates

In a much anticipated statement, the Fed vowed last week to keep interest rates near zero for “a considerable time.” However, it did set a more aggressive schedule of projections for rate hikes in the future.

It’s no secret that interest rates have been very, very low since the financial crisis. This has been by design, since the Fed has kept its benchmark rate at near zero since then, and has now indicated that it is in no hurry to change course.

Borrowers have seen the benefit of this policy in the form of very low rates on mortgages, auto loans and other forms of consumer credit. Companies have also been able to borrow money at very low rates.

Savers, on the other hand, have suffered years of ultra-low APYs on CDs and other insured savings options.

With the economy improving recently, there has been much speculation over when (not whether) the Fed would signal a rate hike. The Fed fuelled speculation last year when it announced that it would “taper” off on its humongous purchases of mortgage-related securities.

The Fed’s bond purchases had been a central part of its attempts to stimulate the economy. The taper policy seemed to be part of a return to “business as usual.” A true return to normalcy would include higher interest rates.

Indeed, the Fed has indicated its intention to raise rates – perhaps as early as next year. But this latest statement sends a mixed message in this regard, with continued ultra-low rates for the time being.

The Fed did release some new projections of where it sees rates in the future, and these projections show rates rising higher, and faster, than had previously been the case.

For instance, the median projection for next year is now 1.375%, versus a 2015 projection released back in June that called for 1.125%. The Fed now sees its rate moving to 2.875% by the end of 2016, while back in June it saw the rate rising to 2.50% by the end of 2016.

These rates seem very low, but keep in mind that they simply refer to the rate at which Federal Reserve banks lend to each other. That rate has been near zero since the crisis, so a rise of even one percent could have a more pronounced impact on the rates you see on mortgages and car loans.

Remember, fixed 30-year mortgages have historically been at 6%-8%; what we’ve seen in recent years has been an unprecedented break from history – and one that has been caused almost entirely by the policies of the Fed. A real move by the Fed to raise rates would surely result in mortgage rates that were much closer to this historic range.

For now, things should continue on their present course.


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