Home buyers dodge a bullet for now. Feds do not raise the interest rate this week after much consideration. Great for potential home buyers, But rate hikes are expected very soon!
If you have been thinking of purchasing a home better do it now! Contact us if any of the great homes we have been sending you interest you. We will schedule an appointment to view them and start the offer process.
Hurry, Don't Delay Any Longer! Even Just A .25% Increase Calculates Into a $60 Increase In Monthly Payment On A $400,000 Home Purchase Amount.
After months of speculation, the Federal Reserve decided to leave its target borrowing rate unchanged, at 0%—0.25%, at its two-day meeting this week. Earlier in the summer, many investors expected the central bank to raise rates in September for the first time in nearly a decade, as U.S. unemployment continued to fall and GDP continued to grow. But as inflation has come under pressure, the Fed elected to maintain its accommodative position.
Viewpoints checked in with Jurrien Timmer, director of global macro at Fidelity, to discuss the significance of the decision.
Why did the Fed decide to leave rates unchanged, at 0%–0.25%?
Timmer: Essentially, the Fed had to weigh dueling forces, with global economic fears on one side and U.S. economic strength on the other.
The Fed has a dual mandate to promote maximum sustainable employment and stable prices. While the employment side of the Fed’s mandate to raise rates has been met—joblessness fell to 5.1% in August—inflation has been low and remains below its target of 2%. Falling import and commodity prices and a stronger dollar have put more downward pressure on inflation. In the end, the fears about these disinflationary forces won out.
Does the Fed’s decision suggest that the U.S. economy is in trouble?
Timmer: Weakness around the globe doesn’t directly affect U.S. retail sales or employment, but it has taken a toll on market conditions. In recent months credit spreads have moved higher on investment grade corporate bonds and high yield bonds especially, raising the cost of financing; the dollar has moved higher; and inflation expectations have moved down. While everyone is focused on the Fed borrowing rate, these market forces are actually more important—in effect, the market has been tightening for the Fed.
The Fed doesn’t want the market to react too much, especially to the point that it could hinder growth, so it has decided not to raise rates, and I expect it is hoping market volatility calms down.
What does this mean for rates going forward?
Timmer: Nearly everyone wants the Fed to be early and shallow—making small rate hikes before inflation accelerates significantly. But if the Fed waits too long and the inflation genie comes out of the bottle, they may have to hike faster. Rapid rate moves have historically been problematic—in the past, rapid rate hikes have tended to slow economic expansion too much, sometimes turning growth into recession
My guess is that the Fed has concluded that the risk of being behind in fighting inflation is much less than the risk of being too early. Given of the deflationary forces in the world today, the Fed has the leeway to wait longer.
I think the Fed also wants to avoid surprising the market, as it did in the “taper tantrum” in 2013. Typically, the market prices rate hikes correctly—the move is known and discounted by investors before it takes place. Maybe in three months, if the market prices it in, that will help make the Fed more comfortable making a change.
What does this mean for investments?
Timmer: The market was not expecting a rate hike, so this outcome is exactly what was priced in. So while there is often a lot of noise immediately following a Fed announcement, there shouldn’t be a lot of market movement in the short term.
Long-term, conditions haven’t really changed. The United States remains the best house in a bad neighborhood—domestic economic progress is better than in most other developed countries. With slow growth, a low rate environment may persist for longer than many investors were anticipating.
When the Fed does raise rates, history suggests that the first hike traditionally isn't been a big problem for the stock market. Usually, the economy's doing pretty well, and we usually have a benign low inflation environment. That's true today. However, what is different today is that we have a much weaker global environment, inflation is much lower, and we've had a lot of market volatility lately.
If the Fed does move to tighten in the near term, it's going to squeeze dollar liquidity even more. In my view, that could potentially be an even bigger headwind for some areas, like China and emerging markets, which have already been hit the hardest. So, my expectation going forward is that the market volatility we're seeing is going to remain relatively elevated.
We will get a rate hike at some point, but I don't think a big spike in interest rates is on the horizon, so I think it still makes sense to diversify with high-quality bonds. If the U.S. economy holds up well, like I think it will, there might be buying opportunities in U.S. stocks.
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