The incoming rise of the federal funds rate is already affecting mortgage rates and other long-term rates, so people are hurrying to buy a home before the central bank makes the move.
For instance, Rose-Linn Jensen, 45, who would have preferred to prospect the housing market in L.A. for at least one year before buying her house, said she would hasten things up.
She explained that if she waits a little more mortgage rates would raise by 0.5 percent, which would cost her an extra $50,000.
Higher mortgage rates are a ripple effect of the Federal Reserve policymakers’ decision to raise the key interest rate, which was almost zero for almost seven years. The last time the U.S. central bank hiked the rate was in 2006.
Analysts explained that the Federal Reserve does not only raise a short-term interest rate, it raises the cost of money to businesses, state, and consumers, as well.
Economists have long signaled that long-term rates such as mortgages would start rising at the news that the Fed’s first rate would go up. The raise is expected to come this Wednesday, but the highest probability is later this year.
“Long-term rates are effectively a series of short-term interest rates. If the trajectory of interest rates is expected to change in years to come, long-term interest rates are going to reflect that,”
explained Greg McBride, a financial analyst at Bankrate.com.
But while certificates of deposit, mortgages, and bonds are affected by other factors as well, the key factor remains the fed rate because it reflects how the entire economy is running.
Since the Great Depression in the 1930, the Fed’s policymakers have been aggressively lowering rates. But lower rates have hurt savers and people with fixed incomes. So, an increase of the federal funds rate is expected to help the former although analysts expect a very “volatile period” as Wall Street will try to adjust to the new financial conditions after so many years of near-zero rates.
One of the analysts said that if he were a retiree with a large sum of cash on his hands, he would start putting a portion of that sum into a fixed investment as soon as the rate rises. Nevertheless, because of the volatility and additional interest rate increases analysts recommend short-term investments including one-year certificate of deposits or bonds
The chairwoman of the Federal Reserve Janet L. Yellen announced in May that the first increase of the federal rate would be of 0.25 percentage point. But there will be more in the next several years. The goal is to get the rate to a healthier 3.5 percent to 4 percent level.
Image Source: Coldwell Banker
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