June 20, 2017 –
The Federal Reserve Board’s Open Market Committee met last week to consider raising short-term interest rates. As we approached the meeting, the consensus was that the Fed would move their Discount and Federal Funds Rate higher by one-quarter of one percent. The weaker than expected jobs report put a bit of doubt in some analysts’ minds; however, most were still expecting the increase to be approved.
Thus, no increase would have been somewhat of a surprise and an increase of more than one-quarter of a percent would have been a major surprise. Therefore, the fact that the Fed moved by one-quarter of one percent was seen as somewhat of a non-event. Just as importantly, their statement released at the conclusion of the meeting provided us clues as to what the members thought of the state of the economy. The statement lauded the progress of the economy and downgraded their forecast for inflation. They continue to espouse a gradual rise in rates and, in the fourth quarter, the Fed expects to start selling off some of the assets they have amassed in the past to help the economy.
Anytime we are focused upon actions by the Federal Reserve Board, we have to remind our readers which interest rates the Fed controls directly. The Federal Funds Rate and the Discount Rate are rates the Fed charges member banks and member banks charge each other for overnight funds to balance their sheets. Thus, when we indicated that these are short-term rates, they are very short term. In reaction, other short-term rates such as three- and six-month T-Bills are affected most directly. On the other side of the coin, long-term rates, such as home loans, can move in tandem or have a different reaction, especially if the markets feel that the Fed is staying ahead of any threat of inflation. Thus, an increase in interest rates for home loans are not guaranteed to follow suit, though certainly the Fed’s action last week does pose that possibility.