Fed may push mortgage rates higher in 2017

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The Federal Reserve predicts that it will raise short-term interest rates three times in 2017, instead of two. That probably means mortgage rates will continue to rise next year. But you might have two or three months before they rise in earnest.

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In September, the Fed predicted it would raise the federal funds rate twice in 2017, for a total of half a percentage point. Today, the Fed revised its economic outlook for 2017. Things are looking a little better:

  • The central bank predicts the economy will grow 2.1 percent next year. Previously, it had forecast 2 percent growth.
  • The Fed predicts the unemployment rate will be about 4.5 percent next year. Previously the forecast was for a 4.6 unemployment rate.

Fed Chair Janet Yellen cautions people not to read too much into the revised projections. “I want to emphasize that the shifts that you see here are really very tiny,” she says.

Fed projects more hikes. Mortgage rates to follow?

If the Fed follows through on its forecast, mortgage rates probably will rise, too. They’ll probably go up before the Fed raises rates, instead of afterward. That’s what happened this time: Mortgage rates have been rising since before the election, and part of that increase has been in anticipation of this Fed rate hike.

So if investors believe the Fed will increase the federal funds rate around the middle of 2017, you’ll see mortgage rates begin to rise several weeks in advance.

“Rates will likely stay the same until about March, so buyers considering a purchase in 2017 may want to consider getting into the market now,” says Jonathan Smoke, chief economist for Realtor.com. “Signs point to the Fed raising rates at least three times next year, and just like we’ve seen in the last month, mortgage rates will likely move proportionately in anticipation of those increases, as clear data emerges about stronger economic growth and inflation.”

He adds that the Fed and the financial markets “will have to wait to see what comes of U.S. fiscal policies in the weeks and months ahead and how that impacts the economy and the potential for more inflation.”

If the Fed believes the government is courting inflation, it will raise short-term interest rates more often.

Instead of four increases, there was one.

New president in town

Doug Duncan, chief economist for Fannie Mae, also points out that the Fed raised rates fewer times than it predicted a year ago. He adds that we need to wait and see how the new president and Congress work together next year.

“Much of the upbeat financial data, including the jumps in interest rates, the dollar and equity prices, are largely due to the anticipation of stronger economic growth from suggested fiscal stimulus and deregulation from the new administration and Congress,” Duncan says. “Whether that bullish view will come to fruition hinges on the priorities of the incoming president and the willingness of Congress, as candidate Trump also campaigned on anti-growth trade policy. The Fed will likely be in wait-and-see mode given this substantial policy uncertainty, and we view this prudency a virtue.”

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Holden Lewis

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