FED Will raise today but then what?

[Cal C.]

I'd put it at a 90% certainty that the fed will raise rates .25% today, but what will they do over the next 12-24 months?  

I will argue that very little will happen in that time period.  Perhaps 2-3 more quarter point increases in the Fed Funds rate but nothing more than that.  

My reasoning is pretty easy to follow- 1) Many of the rest of the world's central banks are lowering rates in fact some are going negative.  2) Inflation is currently a non-factor and is expected to be until 2018 given the continuing rout in commodity prices I don't see that turning around any time soon. 3) Labor participation rates are at long term lows.  Factor in underemployment and that looks even worse.  Yes, I know the Fed and others are talking about full employment, but wage growth doesn't bear that out.  In fact, I'd argue if it wasn't for certain hard to fill jobs receiving outsize increases in wages that overall wage growth would be negligible if not going down. 

But the fourth reason is really my most compelling argument.  The federal debt is now well over $18 trillion and that doesn't count the trillions in unfunded liabilities for medicare et al. Each percentage point in interest rates the Federal government pays on its debt means over $100-200 billion added to each and every year's deficit.    The last time the Fed raised its funds rate the debt was at ~$8.5 trillion.   Think about that for a minute.  Do you really see a significant rise in the Fed funds rate? I don't until we have a significant chance of above average inflation in our immediate future.   

[Ryan Gillette]

Maybe I'm too close to it as a lender, but these changes on a micro-scale are significant to purchase demand. It's a pretty big deal at least when it comes to borrower psychology. If I pre-qualify someone when their rate is 3.875% and then the market reacts and drives rates up to the high 4's before it settles down. Borrowers can focus on the rate and put their plans on hold or get discouraged. Not only that but I pre-qualify them for up to a $300,000 house and rates jump .5-1%, and they come to me with a contract for $310,000 - there's a solid chance they won't qualify anymore. Borrowers see the decrease in purchasing power. They used to get a $300K house for $2000/mo and now they only get a $280K house for $2000/mo. And they're not wrong to feel that way either - it's just how things were framed to them.

So to your question, my prediction is the market will react (as it has this week) and rates will get worse and we'll have slump in demand short-term, and that rates will settle down for the spring market. And the Fed will keep repeating this in winter markets so long as the economy, specifically the housing market, continues to strengthen.