The Federal Open Market Committee met on Wednesday (December 16th, 2015) and approved a minimal 25bp increase in the Fed Funds Rate. This marks the first rate increase since 2006.
Throughout the recession, the Fed Funds rate has remained at zero. The Fed would like to see a slow climb throughout the first part of 2016 that will ideally stabilize between 0.25% and 0.50% around the second or third quarter. It is anticipated that the increase will ease up around 0.375%. Inflation throughout the recovery has been substantially less than the 3% annual target due to a slow recovery domestically and weaker markets abroad. The primary purpose of this move seems to be an effort to normalize our growth in preparation for the next cycle.
The weaker global markets will likely keep the 10-year treasury rate from any kind of drastic increase in the short term. Foreign demand is just too high for US bonds for any immediate impact to be realized. Keeping a close eye on US currency value as it relates to China and Japan would be a better barometer for any 10 year increases in the short term. If those markets rebound, then a mass sell-off of US bonds could be expected, which will lead to an increase in rates.
Overall, there seems to be nothing to panic about. The Fed is merely testing the strength of the US economy and building in some cushion for the next recession that could be 18 to 36 months away. Going in to the next phase of the cycle with Fed Fund rates at zero would make it difficult for the Fed to intervene and get back on the right track. Given the last increase in June of 2006 pushed the rate to 5.25%, we have a long way to go before we see mortgage rates back in the 7% to 8% range. It would probably be safe to assume that numbers like that won’t be seen until the next cycle. For now, our expectations are that mortgage rates in the short term will not see much movement as a result of the increase.