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What You Should Know About Interest Rate Hike

What should you know about the Federal Reserve Interest Rate Hike. Learn about interest rates hike from this Fresh Insights article.

Today, the Federal Open Market Committee (FOMC) will meet for the final time this year. And there’s a very good chance that the FOMC will raise the federal funds rate, or fed rate, during this meeting by a quarter of a point from 0.50 percent to 0.75 percent.
 
In fact, MarketWatch.com notes that according to the trading of federal funds futures contracts, there is a 100.2 percent chance that the Federal Reserve will raise the federal funds rate to 0.75 percent. So unlike during the days leading up to some FOMC meetings when there has been uncertainty about a possible rate hike, there hasn’t been much Fed drama this week.

 

It’s Baked Into the Cake

 
Given the near-certainty of a Fed interest rate hike by the Fed this week, we asked Cadence Trust Services Senior Vice President Michael Zavidny what business owners and investors should know in advance of the hike.
 
“Since the markets have been anticipating this bump in interest rates for some time, I believe it has already been baked into the cake, so to speak,” Zavidny said. “This week’s quarter-point rate increase is already in the rear-view mirror as far as the markets are concerned.”
 
Zavidny pointed out that while the Fed has waited until now to increase the federal funds rate, interest rates in general have been rising since September, and especially since Election Day. “Bonds have been routed this fall and any rate that’s LIBOR-based has gone up,” he says.
 
Mortgage rates are a good example. During the two days following the election, the average rate on a 30-year fixed-rate mortgage rose by a quarter of a percentage point to 3.87 percent. By early December this rate had topped 4 percent.

 

A Historical Perspective

It’s important to point out that this is still a very attractive mortgage interest rate from a historical perspective. For example, the average 30-year fixed-interest mortgage rate over the past 45 years is 8.26 percent, according to Freddie Mac — or more than double current rates. However, the speed at which rates have gone up post-election is fueling fears among some that mortgage rates could rise further and faster than previously expected.

 
How far and fast mortgage interest rates rise next year will be driven by both market forces and Fed actions. In particular, markets will be keeping a close eye on whether or not the Trump administration’s fiscal policy leads to higher inflation.
 
“There’s been a lot of talk about increased infrastructure spending under President-elect Trump and how this is going to boost economic growth,” said Zavidny. “We’re optimistic about that and also mindful that it may take a while for this spending to considerably impact jobs and the economy.”

 

Looking Ahead

Most analysts are expecting two or three more rate hikes in 2017. For example, a 25 basis point rate increase in June and another 25 basis point increase next December, according to some reports.

 
“The Fed will continue to be data dependent when it comes to making interest rate decisions,” said Zavidny. “I think we’re going to need to see some wage inflation in order to justify more interest rate hikes next year.”
 
If you have more questions about the interest rate environment and how this affects your business’ and family’s finances, please contact your Cadence Bank Relationship Manager.
 
You might also be interested in Peering Ahead: What’s in Store for Middle Market Businesses in 2017.
 
 
This article is provided for general informational purposes only and is not intended to provide legal, accounting, tax or other advice. The article includes predictions about the economy which are subject to a number of variables. As a result, such predictions are subject to change and you should not rely on this article as an accurate, complete or timely statement or guarantee that such predictions will become true. You should confer with your legal, accounting and tax advisors for their input regarding the possible outcomes of the economic subject matter discussed herein.


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