Chairman Ben S. Bernanke said last week that the Fed is monitoring these rates but expressed hope that consumer confidence could offset the increase. Since then, interest rates on 30-year fixed mortgages have gone up at least half a percentage point, a rare jump for such a short time.
The Fed’s $85 billion-a-month bond-buying program is one of the last sources of economic stimulus for the country. Officials have been trying to prepare the markets for its eventual end. Bernanke said last week that will probably occur in mid-2014, when the unemployment rate is expected to be about 7 percent.
But the jobless rate is not the only consideration. The Fed is looking for faster economic growth and a pickup in inflation. The government on Wednesday said the economy expanded at an annual rate of 1.8 percent — well below its initial estimate of 2.4 percent. Meanwhile, inflation has fallen to less than 1 percent, about half the Fed’s target rate.
The central bank could also adjust its timetable if the real estate market took a turn for the worse. Officials have repeatedly credited the housing recovery with helping to rebuild Americans’ wealth, boost confidence and support greater spending. A closely watched index of home prices in 20 major cities released Tuesday jumped a record 12 percent in April — when interest rates were falling.
“While other parts of the economy may be sputtering, the housing market continues to show the strength and resilience of the consumer,” said Kim Fraser, senior economist for BBVA Compass.
To be sure, the spike in interest rates may prove temporary. Home buyers could also shrug off the increases, which analysts say do not yet translate into significantly larger monthly mortgage payments. But the Fed will be closely watching the ripple effects through the real estate market, along with other rate-sensitive sectors such as auto sales.
Speaking to reporters last week, Bernanke tried to hedge the timeline for pulling back the Fed’s stimulus. He has repeatedly said that the central bank’s actions will depend on economic data, such as progress in the labor market and the pace of growth. Last week, he said the timeline could also change if “financial conditions are judged to be inconsistent with further progress in the labor market,” he said.
“Our policy is in no way predetermined and will depend on the incoming data and the evolution of the outlook,” Bernanke said during the press conference.
Markets, however, may not have gotten the message. The chairman’s remarks fueled fears that the Fed might wind up raising its target for short-term interest rates sooner than expected. U.S. stock markets plunged 3.5 percent in the days after Bernanke’s remarks. Yields on 10-year Treasury, the benchmark for many interest rates, have jumped to the highest levels in two years.