The big economic news this week was from the Federal Open Market Committee (FOMC) which, as expected, increased overnight lending rates by .25% point. These rates are now pegged at 2.00% – 2.25%. The increase came as no surprise to markets as it was well forecasted by the Fed.
As with each of these meetings, the real focus is on the discussion with the Fed Chairman after the committee vote. Chairman Powell calmed the bond markets with his commentary and his belief that inflation will remain tame, which was supported Friday morning by the Fed’s favorite inflation gauge, the Core PCE, which was unchanged from July to August and remains at 2%, right within the Fed’s target range. Government and mortgage bonds traded well after the meeting and the trend looks as if it will continue through the week. Further helping to keep a lid on our domestic interest rates are potential debt and political issues in Italy, a slowing European and Chinese economy, and ultra-low interest rates in Japan. For the moment, the U.S. is outshining the rest of the world as our domestic economy is booming, consumer and business confidence is high, and company earnings remain strong.
As short-term interest rates gently move higher, there are some experts contending that it is time to be more risk-averse. Remember it has been ten years since we have seen interest rates at current levels and with high equity valuations as well as home and commercial real estate prices at pre-recession levels, we agree with this sentiment. However, there appear to be no signs of a recession and due to more robust underwriting guidelines in residential lending, banks remain stringent which will protect banks during the next recession.
However, given the strong fundamentals of our economy, interest rates while off of historical lows, are still attractive. Therefore, we continue to advise our clients to lock in interest rates as the safer decision.