This will Likely be the Week

 has been 8 years since the Fed lowered the Fed Fund Rate to .25%, thus dropping the Prime Rate to 3.25% (December 16th, 2008 to be exact).  It hasn’t moved from that point since that time eight years ago.  The Fed meets this week (ironically on December 16th again) and I believe for the first time in a long time there will be a change in the Fed Fund rate.  The economy added 211,000 Nonfarm Payrolls in November, handily beating expectations. Plus, October's number was revised upward by 27,000 payrolls. This confirmation that October was a solid month for jobs is significant, because monthly employment data is volatile and can get hit with big downward revisions.  The Unemployment Rate held at 5.0%, the labor force grew by 273,000, and Hourly Earnings, up 0.2% in November, are now up 2.3% over a year ago. Home builder payrolls jumped by 32,000, their biggest monthly gain since 2005. Investors felt this data indicates the economic recovery is robust enough to withstand a rate hike from the Fed in December.  My guess is that we will see the rate move up .25%.
So what does that mean for mortgage rates?  In my opinion, not a lot – at least not immediately.  For the most part, I believe the long term markets, such as the FNMA mortgage bonds, which mortgage rates follow in step, have already built into their data the fact that this is going to occur.  Over the longer term, I still don’t see rates moving much above 5% (on the 30 year fixed), particularly in 2016.  Keep in mind that the Fed Fund Rate, that impacts the Prime Rate, is a short term rate and the primary focus of raising the short term rates is to stave off inflation – which is the real threat to longer term rates.  If you go back to the last time the Fed Fund Rate was in an upward trending environment, the Fed increased the rate over 4% between 2004 and 2006.  In that time period, mortgage rates increased less than 1 full percent.  Granted each scenario and time period is different, so there is always a question mark.  But the best way to predict the future, particularly with markets, is to look at the past.  Assuming we stay in line with what occurred before, we should see rates staying below 5% out into the near future (I’m thinking through 2016 at least).
The reality is that if the Fed is finally confident enough to start increasing short term rates, it is a good sign that our economy is finally on its feet again and that there is belief that it can once again stand on its own without all of the stimulus from the Fed.  We’ve enjoyed a great run here in middle Tennessee.  So let’s hope they are right.