Federal Reserve raises interest rates a quarter point to 3/4%, three hikes expected in 2017 (Updated)

In a year-end move largely expected by market watchers, the Federal Open Market Committee on Wednesday (Dec. 14) raised interest rates for only the second time in nearly 10 years, citing the continued strength of the U.S. job market and the moderate expansion of the U.S. economy.

Federal policymakers also said the U.S. economy would likely grow at a rate in 2017 that would warrant up to three rate increases in 2017, up from the FOMC’s previous forecast of only two.

“In view of realized and expected labor market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to 1/2% to 3/4%. The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a return to 2% inflation,” the FOMC said in a statement.

Members of FOMC said economic information that federal policymakers have received since November indicates the timing was right to raise rates a quarter point nearly a month before President-elect Donald Trump takes office.

“Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market conditions will strengthen somewhat further,” the FOMC said.

As news of the rate hike reached Wall Street, the Dow Jones Industrial Average and other U.S. indices took a dive in midday trading on Friday. The Dow topped 20,000 in early trade, but was down 0.31% or 60.75 at 19.850.46 with a few hours left in the midweek session.

In a press conference with media, Fed Chair Janet Yellen said the modest increase in the federal fund rates is “quite low” compared to other periods of slow growth in the U.S. economy.

“The economic outlook is still very uncertain,” said the Fed chief.

In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee said will assess realized and expected economic conditions relative to its objectives of maximum employment and 2% inflation.

“This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments,” the FOMC said. “In light of the current shortfall of inflation from 2%, the Committee will carefully monitor actual and expected progress toward its inflation goal.”

The Central Bank members said they expect economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate under the new president, but at a faster pace than previous years.

“The federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data,” the panel said.

UPDATED INFO:
REALTORS: RATE HIKE WILL HURT HOME SALES
Also, after the today’s FOMC meeting, the Fed is now forecasting that U.S. Gross Domestic Product (GDP) growth will 1.9% this year, which is slightly above its forecast in September. The U.S. economy in 2017 is now expected to see lukewarm growth of 2.1%, also slightly more optimistic projected in the previous quarter.

According to the “second” GDP estimate released on Nov. 29 by the Bureau of Economic Analysis, U.S. growth in the third quarter was above the “first” third quarter GDP estimate of 2.9% on Oct. 28, and a marked improvement over tepid growth of only 1.4% in the third quarter of 2015.

The third quarter GDP report was significantly better than the first half of 2016 when U.S. economic expansion was well below post-recession levels. Real GDP, which is the value of the goods and services produced by the nation’s economy less the value of the goods and services used up in production, increased at an annual rate of 2% in the first quarter and fell even lower in the second quarter to 1.4%.

The BEA is expected to release the third and final estimate for the third quarter GDP report on Dec. 22. The GDPNow model forecast for real GDP growth in the fourth quarter of 2016 is now only 2.4%, down from a robust 3.6% just a month ago, according to the Atlanta Federal Reserve.

Incoming president Donald Trump has predicted GDP growth of 4% to 5% during his administration, well above the Fed’s long-term forecast for economic growth of 1.8%. Association of Federal Credit Unions (NAFCU) Chief Economist Curt Long said the Fed action did not make any assumptions about Trump’s economic agenda.

“A large spending bill accompanied by tax cuts certainly has the potential to increase growth and inflation, paving the way for faster rate normalization in the coming years. But the Fed will stick to its wait-and-see approach,” Long said, adding that the overall the impact of a quarter point rate hike on U.S. households should be minimal.

But in the National Association of Realtors 2017 housing forecast released Wednesday, officials said against the backdrop of rising mortgage rates and shrinking consumer confidence existing home sales in 2017 would be modest compared to this year.

“Rents and home prices outpacing incomes and scant supply in the affordable price range has been a prominent headwind for many prospective buyers this year,” said NAR economist Lawrence Yun. “Making matters worse, the unwelcome reality of higher mortgage rates since the election is likely further holding back confidence. Younger households, renters, and those living in the costlier West region — where prices have soared in recent months — are the least optimistic about buying.”

The current average 30-year fixed mortgage rate in Arkansas on Wednesday increased from 3.95% to 3.97%, according to Zillow. State mortgage ranged from the lowest rate of 3.85% (Vt.) to the highest rate of 4.02% (Mo.). Arkansas mortgage rates are higher than the national average rate of 3.95%.

Compared to last week’s average Arkansas rate of 3.9%, the Arkansas mortgage interest rate is up 7 basis points. Additionally, the average 15-year fixed mortgage rate in Arkansas increased from 3.1% to 3.13% and the caverage 5/1 ARM rate is up from 3.07% to 3.09%.

The FOMC said it will also maintain its existing policy of reinvesting principal payments from its holdings of agency debt and mortgage-backed securities, and rolling over maturing Treasury securities at auction.

“(We) anticipate doing so until normalization of the level of the federal funds rate is well under way,” the Committee said.

At today’s meeting, all 10 members of the federal panel voted in support of Yellen’s monetary policy actions. In response, U.S. equities saw their worst day in nearly two months as investors reacted coolly to the news of three rate hikes in 2017. The Dow fell 118.68 points, or 0.6%, to 19,792.53, while the S&P 500 index fell 18.44 points, or 0.8%, to 2,253.28. The tech-laden NASDAQ composite closed at 5,436.67, down 27.16 points, or 0.5%.