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US mortgage interest rates rose Monday to 2.0%, their highest level since October and a new record since October 2013, as mortgage-backed securities (MBS) continued to weigh on consumer sentiment.
The benchmark S&P 500 gained 0.6% to 2,078.40.
The Dow Jones industrial average lost 0.7% to 16,074.14 and the Nasdaq Composite lost 1.6%.MBS and other types of debt remain a major drag on US consumer spending, with the average consumer spending rate rising from 2.7%, the highest rate since the depths of the financial crisis, in March, to 3.3% in September.
The unemployment rate rose to 7.7%.
The Federal Reserve is set to raise rates at its meeting in September to bolster economic growth.
“In the current environment, we believe that further rate increases are warranted,” Janet Yellen, the Federal Reserve chair, said on Monday at the meeting.
The increase in rates comes on the heels of a recent report by Moody’s Analytics that warned that the U.S. economy will likely shrink by more than 2% in 2018.
Yellen also reiterated her views on the role of inflation and the U-turn to monetary stimulus in a speech on Monday.
In her speech, Yellen said she wants to see a broad range of economic indicators and the labor market improve to give the Fed more certainty about how much stimulus to tap in the short term.
Read moreThe unemployment rate fell to 6.1% in August from 6.6%, the lowest since March, and the jobless rate has fallen for a third straight month, the third time in four months it fell below 6%.
“The economy continues to grow at a solid pace,” said Joe Reedy, chief economist at Wells Fargo Securities.
“We are seeing the economy pick up from where it was in the spring and summer, but it is also slowing down as a result of the strong recovery that we have seen.
We continue to see an expansion in housing and construction activity, which is good for the economy.”
The Federal Deposit Insurance Corporation (FDIC) has been tightening its lending standards and has increased the amount of reserves available for consumers to meet the mortgage payments they may make.
According to the Fed, it has taken a record $2.2 trillion out of the economy, and this was largely due to the increase in MBS.
While the number of MBS has been on the decline, it is still a significant drag on economic activity, with household debt as a percentage of GDP rising from 14.9% to 17.1%.
The Bank of England, the European Central Bank, and other central banks have raised their benchmark interest rate on Monday to 0.25% from 0.20%.
Read moreYellen has not yet indicated when she will raise the Fed’s benchmark interest rates.
She will likely raise rates again at a later date, but her recent comments suggest that she is more willing to do so.
She will also need to signal that the Fed is likely to take further steps to stimulate the economy in the coming months.
Since September, the U S economy has added more than $3 trillion in new jobs and the unemployment rate has declined to 6% from 6% in the last six months.
The labor force participation rate, a measure of the percentage of people who have completed a job, rose to 65.7 % from 64.9 % in August.
A number of other factors, including the housing market, have helped the economy get back on track, including a rise in the number and quality of housing permits and new home sales.
But the Fed still sees a lot of room for improvement.
Last week, it said that it is “more likely than not” that the economy will grow by 1.5% in 2019, which would be the third straight quarter of positive growth, and it has also raised its benchmark lending rate to 0% from its zero threshold of 0%.
But analysts warn that the economic outlook is still too bleak for the Fed to raise the benchmark interest, and that the longer it waits, the less confident the Fed will be in its plans to stimulate economic activity.
Economists are also concerned that the government’s fiscal stimulus plans are too tight, and have raised concerns that the federal deficit is about to surpass $1 trillion.
As for whether the Fed should raise rates further, Mitt Romney, the Republican presidential nominee, said Monday on MSNBC that the question should be “who is responsible for that?
If it is the Federal government, I think they ought to be more cautious about it, but if it is local and state governments, I don’t think they should.”
Read the full article on Forbes Follow @NatashaFlynn