Short-term mortgage rates such as adjusted-rate mortgages (ARMs) and home equity lines of credit (HELOCs) are likely to remain stable with the Federal Reserve hitting pause on further rate hikes after the Federal Open Market Committee (FOMC) meeting on Wednesday.
In its post-meeting statement, the FOMC said that in support of its statutory mandate to foster maximum employment and price stability, the committee had decided to maintain the interest rate at 2.25 to 2.5 percent. "The Committee continues to view sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee's symmetric 2 percent objective as the most likely outcomes," the committee said.
In a press conference after the meeting, Fed Chair Jerome Powell said that the case for raising rates had weakened and that he would "want to see a need for further rate increases" with inflation being the key.
Looking at the next few quarters, the committee indicated that it would be "patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate" due to the current global and economic developments and muted inflation pressure.
In a shift from looking at a gradual increase to risk management, the FOMC also indicated that it was "prepared to adjust any of the details for completing balance sheet normalization in light of economic and financial developments."
"For consumers, the pause in rate hikes means a break in rising interest rates on borrowing for credit cards and personal loans, though savers will see less offers from banks of higher deposit rates," said Tendayi Kapfidze, Chief Economist, LendingTree. "Though not directly related to the Fed Funds rate, mortgage rates have been declining which may support the slowing housing market."
"This announcement might make HELOCs more attractive to homeowners who are deciding whether to pay for home improvements by getting a credit line or by getting a cash-out refinance," said Holden Lewis, Home Expert at NerdWallet. "If the Fed is at or near the end of this series of rate hikes, some homeowners will feel comfortable taking out HELOCs because the rates are unlikely to rise much, if at all."
Looking at the effect of the current Fed statement on the broader economy James Knightley, Chief International Economist at ING, said that the potential inverted yield curve in the US was a challenge for the banking system "since banks have long-dated assets and short-term liabilities and this environment would deter lending."
"The Fed could accelerate (or decelerate) sales of its longer-dated Treasury holdings with the Fed commenting in a separate note that it is "prepared to adjust" balance sheet normalization (both in size and composition) after agreeing to maintain the $50bn roll off per month," Knightley said. "Selling longer-dated Treasuries would re-steepen the curve, thereby putting up borrowing costs but taking some of the pressure off the financial system. However, with Fed Chair Jerome Powell saying it won't be used as an "active" tool, the Fed funds target rate will remain the main driver of policy."
But do we see rate hikes in the near future? Both Kapfidze and Knightley said that this was likely. "Taking it all together we are unlikely to see an interest rate rise in the first quarter, but we still think there is a decent chance of a move in June. If the strength of the US jobs market persists and wages keep rising the consumer side should help support growth and generate a little more inflation," Knightley said.
According to Kapfidze, rates could be hiked twice in 2019 if growth remained above potential. "Hikes would occur later in the year, perhaps starting in June if the economy weathers the political risks," he said. "Overall policy uncertainty is extremely high and could start curtailing business investment and expansion plans, including hiring, which may lead the economy to slow at a faster rate."
Click here to watch a video of what Fed Chair Jerome Powell had to say about the meeting.