The Fed minutes signal a 2016 rate hike

Aug 19, 2016  11:20 ET - Victor Whitman - Scotsman Guide

The Federal Reserve appears close to raising short-term interest rates this year, but most housing analysts still don’t expect a rate hike to come before the presidential election.

Minutes released this week from the July 26-27 Federal Open Market Committee (FOMC) meeting suggest that the voting members have gained more confidence in the economy, and several are leaning toward a move to raise rates this year. Only one committee member, Kansas City Federal Reserve President Esther L. George, wanted to raise rates at the July meeting, however. George argued for a 25 basis-point hike.

Most analysts expect a 25 basis-point increase to come at the Dec. 13-14 FOMC meeting, rather that the meetings on Sept. 20-21 and Nov. 1-2 that occur before the election.

According to recent analysis of trends in the futures markets by Bloomberg, there is roughly a 20 percent probabilitythe committee will pull the trigger on a rate hike in September or November, but a 50 percent chance of a move in December.

Fed Chair Janet Yellen could provide more clues next week during her planned speech at the Fed’s Monetary Policy Symposium in Jackson Hole, Wyoming.

“We are still calling for a December increase,” said Danielle Hale, an analyst with the National Association of Realtors. Hale said the minutes indicated that several committee members want more confirmation that the economy is moving in the right direction. Hale said December gives the committee several more months of data to better gauge the strength of the labor market and whether inflation is moving toward the 2 percent annual target range.

Hale also said the central bank will likely hold off on a rate bump until after the election.  

“The uncertainty that surrounds a presidential election does tend to have some economic ramifications,” Hale said. “I think the Fed is watching that, but I don’t think there is any more concern for politics than how it might relate to the real economy.”

Not all are predicting a move this year, however.  

Fannie Mae, for example, believes the central bank will stand pat “given global uncertainties and anemic output growth.” Fannie and its cousin, Freddie Mac, also predict 10-year Treasury yields, which track closely with long-term rates, will stay down. Freddie Mac recently cut its rate forecast for the 30-year fixed mortgage by 30 basis points, believing it will average 3.7 percent through 2017.

If the Fed does raise interest rates this year, longer-term mortgage rates will likely be pushed up somewhat from near historic low levels. Last week, the 30-year fixed rate moved back down to average 3.43 percent, according to Freddie Mac’s weekly survey.

A small increase in long-term rates could deal a blow to the housing market, however, said Daren Blomquist, vice president with ATTOM Data Solutions.

“When we look at the data, it is a highly interest-rate sensitive housing recovery,” Blomquist said. “When we saw interest rates tick up in the second half of 2014, we saw an almost immediate impact on the housing market. Home sales went down, home-price appreciation slowed down. That was directly correlated with interest rates ticking up a bit at that point.”