Weekly Economic Update-In Great Shape

The Fed’s Open Market Committee met this week, declared the economy to be in “great shape,” and raised interest rates. Their concern has switched from stimulating the economy to managing inflation, and they promised more rate hikes this year and next.
Freddie Mac turned its eye on inflation as well, illustrating how its 30-year mortgage can help consumers hedge against it.

The Federal Reserve’s Open Market Committee (FOMC) raised short-term interest rates on Wednesday for the second time this year and the seventh time since they began cutting rates to the bone in 2008. The quarter-point boost set the Feds benchmark rate to a range of 1.75 to 2.0%.

That wasn’t the big news out of the two-day monthly meeting, however. The Fed’s assessment of the economy is increasingly rosy; Fed Chair Jerome H. Powell deemed it “in great shape,” and thus they are beginning to exhibit concerns about inflation. Consequently, they hinted that rather than one more rate hike this year, there are likely to be two.

Among their projections for the remainder of the year was a 2.8% growth in the economy, up from 2.7% in their March forecast, and they revised their estimate for the unemployment rate from 3.8% to 3.6%. They also raised their forecast for headline inflation (also known as raw or total inflation) from 1.9% to 2.1% and see it running slightly above their target rate of 2.0% through 2020.

Freddie Mac economist Sam Khater somewhat discounted the impact of the rate hike. He said, “One thing to point out is that there are a lot fewer consumers today whose debt is tied to short-term rates, and because the majority of consumer debt is from mortgages, this means the recent short-term rate hikes will be less impactful than what was seen in the mid-2000s.”

While the FOMC seems likely to slip in one more rate hike than expected this year, they are holding firm in their forecast of three next year and reduced the prospects for 2020 from two to one.

Hedging a Bet

Since inflation is a trending topic, Freddie Mac suggests that, in addition to its other benefits, homeownership could be a way to hedge against it. As part of its series of blogs commemorating June as Homeownership Month, the company illustrates the protective aspects of a 30-year fixed interest rate.

A gallon of milk that costs $3.16 today will probably cost $5.72 in 30 years, in 2048. A gallon of gas will zoom from $2.36 to $4.27 and the price of the car you put it in will nearly double, from $33,560 to $60,789. And rent--well they are using NYC prices, but still, from $3,417 a month to $6,189.

But the 30-year FRM you close on next week will freeze your mortgage payment at whatever it is then until the day, in 2048, you pay it off. Hard to find a better deal.



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