Federal Reserve Raises Interest Rates Again in the Face of the Longest Bull Run in History

By now the Q3 raise in interest rates have sank in and you are preparing for rates to continue to rise, thanks to the watchful eye of the Federal Reserve. Why the hike? The DOW has quadrupled in the 10 years since the beginning of the Great Recession – a feat that is nothing short of extraordinary. Naturally, the Fed has taken notice and has begun to try to stabilize the economy by raising interest rates, most notably over the past year.

Figure 1- S&P 500 10-year Price Chart – Longest Bull Run in History

As expected, the Fed raised interest rates an additional 25 basis points at the end of September, continuing the measured pace we’ve seen in the past several years. Barring any negative surprises in the economy, a December rate hike is almost certain, as the number of FOMC officials expecting another increase before year end grew to 12 – that’s up from eight last June.

Figure 2- Economic projections of the Federal Reserve Board members

In an effort to predict future rate hikes, we turn to the Fed’s most recent economic projections on unemployment and inflation, which are essentially flat through 2020. Due to key U.S. economic indicators supporting a sustained robust economy, the median forecast for the federal funds rate is anticipated to steadily increase to 3.4 percent in 2020.

It’s not simply the Federal Fund rate that is increasing. In the U.S., more than $1.2 trillion in mortgages and another $1 trillion in mortgage-backed securities are adjustable rate mortgages tied to LIBOR, and many borrowers need to be mindful of these rising rates. Even shorter duration loans consisting of three years or less may experience significant rate hikes leading to substantially higher loan payment during the term of their loan.

With increases in the foreseeable future, it’s nice to know that here at YAM Capital we can provide bridge loans that are always fixed-rate mortgages so our borrowers benefit from never having to worry or pay for expensive rate caps to hedge interest rate risk. If you’re interested in learning more about how we can help your next project, contact us today.