- The U.S. Federal Reserve raised its benchmark interest rate by a quarter-point, to a target range of 2.25 percent to 2.5 percent.
- The Fed rate hike was the fourth such rate increase in 2018.
The Fed's decision to raise interest rates for a fourth time this year was expected given the overall strength of the economy, even as the U.S. stock market is in the midst of its worst December in recent memory. More importantly, the Fed's comments make clear that central bankers are in the process of resetting market expectations for 2019: If economic data come in strong, we should expect a steady path of hikes in 2019. But if macro data turn out surprisingly weak, then the Fed is likely to pause.
Longer-term lending rates, including mortgage interest rates, aren't directly tied to the short-term rates that the Fed targets, but they often move in the wake of these hikes, and mortgage rates have risen nearly 100 basis points since the start of 2018. Over the course of the year, long-term rates have increased by less than might have been anticipated given the increase in short-term rates – a relationship that his historically signaled fears of a broader economic downturn. That means home shoppers have been spared from what could have been a potentially much more dramatic dent in affordability.
Still, home shoppers will have to recalibrate their home-buying budgets since the historic low rates of the past few years, if they haven't already. That lowered price point comes with tradeoffs, though, as inventory is up and price cuts are becoming more common, allowing home shoppers the opportunity to be a bit more strategic. Over time, however, that diminishing buying power can put even more stress on demand for less-expensive homes – where inventory already is lowest – and send prices higher at those most affordable price points.
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via December Fed Rate Hike: Recalibrating Expectations
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