Fed Minutes: Rate Hike a Close Call

The Federal Reserve's daring move to increase the federal funds rate just before the end of 2015 was no surprise to most, but what the mortgage industry did not know was that this initial move would only the beginning of a series of events..

The Federal Open Market Committee (FOMC) released their minutes to their December meeting Wednesday afternoon, showing clear concern about inflation and the economy as a whole.

The minutes noted that "some members said that their decision to raise the target range was a close call, particularly given the uncertainty about inflation dynamics, and emphasized the need to monitor the progress of inflation closely."

Officials also explained that they expect "economic headwinds will persist and that inflation will rise gradually to 2 percent over the next three years," and because of this "most participants judged that it would be appropriate for the federal funds rate to remain below its longer-run normal level from 2016 to 2018," the minutes said.

So when will the next rate hike occur?

"Participants projected that a gradual rise in the federal funds rate over that period would be appropriate as some of those headwinds, such as sluggish foreign economic growth, diminish and the temporary factors holding down inflation dissipate. Some participants noted that a gradual increase in the federal funds rate would be consistent with their expectation that the neutral short-term real interest rate will rise slowly over the next few years," the minutes stated.

As far as housing is concerned, the residential mortgage market was little changed from the previous meeting.

"Credit remained tight for borrowers with low credit scores, hard-to-document income, or higher debt-to-income ratios. Interest rates on 30-year fixed-rate mortgages increased 30 basis points, in line with increases in yields on mortgage-backed securities and comparable-maturity Treasury securities. Nevertheless, mortgage rates continued to be quite low by historical standards," the minutes said.

In addition, a number of officials found that there appear to be "continued improvement in the housing sector, including ongoing house price appreciation, low levels of home inventories, the substantial gap between the rate of household formation and the relatively slow pace of construction, and the possibility that homebuyers may be entering the market in anticipation of higher mortgage rates."

“Now that liftoff is behind us, the question on everyone’s mind is how quickly rates will normalize,” said National Association of Federal Credit Unions Chief Economist Curt Long. “The Fed appears to be eyeing four quarter-point rate increases in 2016, but that depends on a lot of factors falling into place. The minutes indicated that the committee is somewhat less pessimistic about the possibility of slow growth abroad and the threat that might pose to the U.S. than many observers. As for inflation, there appears to be a growing divergence of views about risks to the Fed’s 2 percent target from lower oil prices and a stronger dollar."

Click here to view the complete minutes.