The
Federal Reserve Board has spoken. The increase of .25% in short-term interest
rates surprised absolutely nobody. However, the markets did not like the
statement accompanying the increase which alluded to as much as three rate hikes
in 2017. Of course, last year they talked about the same thing and we had only
one due to several factors. Of course, this year we also have had the "election
effect" on the bond market, which means that rates were already moving higher
before the move.
When
the markets are skittish, any hawkish statement by the Fed was likely to make
the markets more volatile, which is exactly what happened. We actually believe
that the markets could have reacted poorly if the Fed did not increase rates.
This is because the economy has shown enough strength to convince the markets
that keeping rates at artificially low levels was no longer necessary. We must
remember that the Fed controls short-term rates directly and long-term rates
only indirectly. If the markets feel the Fed is being soft against the threat of
inflation, the markets will act on their own in this regard.
So,
what is the bottom line, now that the deed has been done? The Fed's announcement
after the increase tells us that they are satisfied with the direction of the
economy. When the Fed raises rates because the economy is getting stronger, this
is certainly good news. The markets are showing further optimism based upon the
possibility of new economic policies expected to be implemented by the new
Administration. If this optimism turns out to be right, we will see more rate
increases in the coming year, which coincides with Chairperson Yellen's
statement. Again, this represents good news for the average American and the
housing markets, because more jobs will be created. That would be quite a feat
since the economy added over 2 million jobs again this year.
Mike Ervin
NMLS # 282715
mike@mikeervin.com
www.mikeervin.com
(650) 766-8500
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