The Federal Reserve is signaling that it will likely take action on increasing interest rates in two months, despite recent data that shows a weakened economy. This would be the first rate increase since 2006.
Two central bank officials said Wednesday that disappointing job growth, manufacturing activity, and retail sales over the winter had pushed rate hike expectations to later in the year. For more than six years, the Fed has held rates near zero. But June is being viewed as the likely month for the Fed to start its rising of rates.
"I could imagine circumstances where a June rate hike could still be in play," says William Dudley, New York Fed president, and a voting member on the Fed's policy committee. "If the economy's strong, the unemployment rate is dropping, wages are rising, and the outlook is good, you could conceivably get to that point. The bar is probably a little bit higher" for a June hike given recent data.
The minutes from the Fed's mid-March policy meeting, which were released Wednesday, also indicated that June would be a likely start time for Fed officials to start hiking rates. The Fed also indicated that once they did start raising rates, they would do so gradually.
But even a slight rate hike could have ripple effects throughout the economy. The most obvious impact to the housing market would be a rise to mortgage rates. Rates have been near historical lows for years. An average 30-year fixed-rate mortgage averaged 3.70 percent last week, according to Freddie Mac. "The Fed cut rates to historic lows in 2008 in part to reboot the housing market, which collapsed when the housing bubble popped," CNNMoney reports. "When the Fed likely raises rates this year, it will push mortgage rates and auto loans up. That said, it’s uncertain if that will cause home or car buying to slow down."
Source: "Fed Officials Say June Rate Hike Still in Play, Hinges on Data," Reuters (April 9, 2015) and "What an Interest Rate Increase Means for Real People," CNNMoney (March 19, 2015)
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