Federal Reserve Finally Raises Key Interest Rate
Seven years after the Federal Reserve pushed its target interest rate to its bottom, chairwoman Janet Yellen announced today that the Fed’s interest rate will be raising by 25 basis points, or 0.25%. The key interest rate, formerly 0.00% to 0.25%, is now 0.25% to 0.50%. The last time the Federal Reserve raised the key interest rate was in June of 2006.
Experts have been predicting that the Federal Reserve would raise interest rates as early as the beginning of 2014, but the Fed was cautious in its approach and delayed the increase much longer than most anticipated. The recent announcement signals that the Federal Reserve is no longer concerned about the economy being in “crisis mode”. Over 12 million jobs have been added since the recession, and unemployment is down to 5.0%.
The increase also likely signals an intent to further raise the key interest rate in 2016. The two factors that will likely drive the decision to further increase the interest rate are inflation and unemployment. The Fed is projecting unemployment in 2016 to reach 4.7% (down from the 4.8% they were predicting in their September forecast) and growth of 2.4% (up from the 2.3% they were previously predicting). Inflation is currently almost at 0.0%, and the Fed anticipates inflation reaching 2.0% some time in 2018.
How this will effect the real estate market remains to be seen, but what is certain is that the days of record-low mortgage interest rates is likely over. However, as the cost of ownership increases as the Fed further increases rates, one can also expect the rise in housing prices to slow in order to account for the increased cost of ownership.
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