Fed Makes First of Three Expected Rate Hikes in ’17

The Federal Reserve on Wednesday raised the federal funds rate by 25 basis points to a range of 0.75% to 1%, its third rate hike since the end of 2015 and likely not the last in the near future.

Citing strong job growth, a stagnant unemployment rate, and inflation hovering slightly under the Fed’s desired target of 2%, the Federal Open Market Committee voted for the rate increase nearly unanimously; only Neel Kashkari, president of the Minneapolis Fed, voted to keep the rate at its previous range of 0.50% to 0.75%.

In a written statement issued Wednesday, the Fed implied that it wasn’t done increasing the federal funds rate.

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“The Committee expects that economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate,” the FMOC said, though it noted that “the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run.”

The New York Times reported that Fed officials expect to raise rates twice more before the year is out, with a target goal of a 3.0% federal funds rate by the end of 2019.

The Fed only just upped the rate from a range of 0.25% to 0.50% in December, pointing to a similar slate of economic indicators such as inflation, housing spending, and the job market. Prior to that, the Fed made shockwaves in December 2015 when it raised rates by a quarter point from a range of 0 to 0.25%, its first increase in almost a decade.

The quickening pace of rate hikes marks a departure from recession-era monetary policy that resulted in cheap, easy credit for the better part of a decade, as the Fed attempted to help ease the United States out of the housing crisis. The rate range had remained at 0 to 0.25% since the end of December 2008, after a wild two years in which it had dropped all the way from 5.25% in 2006.

Written by Alex Spanko

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  • “What we fear” is now upon us. The increase to the LIBOR indices should be low but in the next six months we should see an overall erosion of maximum principal limit factors.

      • Hey Eric,

        Most of us realize that eventually the effect of increases to the Fed rate is to lift all interest rate indices including those LIBOR indices we use for expected interest rate purposes. While it may not happen for a couple of increases because of possible reductions to the relatively high margins being charged today, eventually if the Fed rate increases go as planned, few, if any, HECM expected interest rates will be at or under the 5.06% threshold by the end of 2018, if not much, much earlier.

        Expected interest rates of over 5.06% drive down principal limit factors which historically make HECMs less attractive to seniors than when the expected interest rates are at 5.06% over less.

      • Thank you both Dan and RMAdvisor, I had a feeling you were talking about interest rates going above the 5.06 floor. Although we still have a ways to go on that, it is a valid concern. Am I right in remembering a time long long ago, when the floor was 5.56, back in 2010 if I am not mistaken? Is there an option to raising the floor?

      • EricSD,

        It is very doubtful if HUD would risk further losses to the MMI Fund from HECMs by increasing the expected interest rate floor for PLF purposes, especially in a new era of rising interest rates. Even if they wanted to there is some question if they could do it without justifying the change through either lower PLFs across the board or higher ongoing MIP, etc.

        A move simply to increase the floor under the Reverse Mortgage Stabilization Act of 2013 is highly unlikely since the result would be to put the MMI Fund at great risk of loss from HECMs.

      • OK, great information. So we are going to be looking at lower and lower margins which will result in lower YSP.
        I know we all somehow make this all work.

      • RMAdvisor,
        Going over the floor and reducing the PL would be a big problem for us, it is hard to believe any LO would be doing that now but if the rates take us there giving borrowers less would be another blow to the industry.

      • Last summer, weekly 10-year SWAP averages hit an all time low (1.30%). This allowed lenders to briefly offer a 3.75% lender margin and still offer maximum PLFs. This is because the Expected Rate rounded to 5% or less (1.30+3.75=5.05). By contrast, today’s SWAP rates are 125 basis points higher and rising. Lenders can barely offer a 2.5% lender margin and stay at the floor rate (2.51+2.50=5.01). While historically this is still a very attractive rate environment, RMA feels that lender margins will only get pinched so far before principal limits will begin to erode. When will expected rates exceed 5.06%? Well, only time will tell.

      • Hey Dan,

        Love the examples.

        It is hard to believe that lenders, especially the TPOs would be willing to go much lower just to keep the expected interest rate at or under 5.06%. It is very doubtful if we will see margins of 1% or 1.5% ever again. Right now even 2% is hard to imagine except where a lender owes a TPO a favor or is in a bidding war.

      • EricSD,

        How much lower will they go? They certainly are NOT willing to have negative margins.

      • EricSD,

        You state four lenders have 2.0 margins right now. Which one of them is willing to offer a negative margin? (By the way what lender goes by the initials SRF? Do you mean RFS?)

      • Thanks, it was a Typo-RFS is correct. Still not understanding your question? I never asked how low will they go? I was simply pointing out to RMAdvisor that 4 lenders that I know of are currently offering 2.0 margins. Offering negative margins?

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