01 Feb 2019

Fed to Focus on Multiple Factors Before Increasing Interest Rates in 2019

All eyes are on the Federal Reserve Board as it decides how to manage interest rates in 2019. High interest rates for loans can slow new mortgages and bring refinancing to a crawl, so the lending industry wants to know which way the Fed leans.

After hiking benchmark rates to 2.5 percent in December, Fed Chairman Jerome Powell scaled back his 2019 outlook from three rate hikes to two. Last month, Powell said the Fed would stress patience, as it declined to raise rates at its first meeting of the year. Forbes now predicts rates may not rise again until June, if then. But Powell and his committee plan to meet more frequently this year in the name of flexibility.

“They’re making the message clear that they’re going to remain more data-dependent as we go into 2019,” said Charlie Ripley, senior investment strategist for Allianz Investment Management.

The Fed wants inflation no higher than two percent. That’s why increasing interest rates have been a recent priority, with four hikes in 2018 and nine in three years. As long as the economy roars, the Fed will tap the brakes.

So how healthy is the economy right now?

The stock markets had a turbulent year but most economic indicators remain positive. Unemployment has held under 4 percent since June and should stay low. Overall, wages are going up. The final 2018 GDP report should show just less than 3 percent annual growth. Even as forecasters expect slower growth in 2019,  they don’t predict a recession this year.

So why scale back the projected rate hikes?

Many experts do think the economy shows early signs of losing momentum and will start to slow in the second half. Some expect a mid-2020 recession. Any slowdown signs could mitigate or forestall any Fed action.

Additional wild cards make it tough to project where the economy will be next month, let alone next year:

Trade Wars

The Trump administration’s tariffs on Chinese goods triggered retaliation and escalation that have hurt American exports. American consumers will also soon feel more pain in the form of higher prices.  While trade tensions have shown signs of easing in early 2019, there are no firm deals.

Government Shutdown

While the 800,000 federal employees who missed checks during the 35-day shutdown will get back pay, there’s no assistance awaiting restaurants, airlines and other businesses that saw sales slump over those five weeks. Not only could the shutdown dent upcoming GDP reports, the deal that ended it offered no long-term resolutions.

Tax Season Surprises

The 2018 Tax Cut and Jobs Act meant a lower tax burden for most people,  but many haven’t adjusted their withholdings. Many may get smaller-than-expected refunds or even owe the IRS money. It could reduce overall consumer spending power come spring and summer.

Trump’s Tweets

President Donald Trump can change policy, rattle stock markets and shift the national conversation with a tweet. He’s made no secret of his disdain for the Fed’s rate hikes, seeing them as a threat to his re-election hopes. While the president probably can’t fire Powell over policy disagreements, as he mused in December, concerns about his Twitter reaction could have a chilling effect.

The Bottom Line

The mortgage loan industry is already stuck in a slowdown. The Fed may continue increasing interest rates and banks are bracing themselves for it. But with so much uncertainty ahead this year, the Fed will monitor the data and be patient. Its two planned rate hikes could easily become one or zero. Use the form to get in touch with us. We’d love to hear from you!

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