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The Federal Reserve Delivers First Rate Hike Since 2006

The Federal Reserve Delivers First Rate Hike Since 2006

The anticipation is over.

At the conclusion of its two-day meeting this week, the Federal Open Market Committee (FOMC) announced the first interest rate increase since leaving the fed funds rate at near zero since 2009. The 0.25 percentage point hike comes after months of “patient” monitoring of fundamental economic data of unemployment and inflation – the Fed’s key mandate is balancing these two.

In a statement Wednesday, the FOMC, the Federal Reserve Board branch that sets monetary policy, said that “the outlook for economic activity and the labor market as balanced.”

Federal Reserve Interest

According to the CME Group, which tracks the probability of a fed funds rate hike, there was a 79 percent chance for a rate hike going into the meeting, after a series of healthy employment reports in previous months. Inflation, however, has been stubbornly below the 2 percent target, despite keeping interest rates low.

The rate hike is expected to have a limited impact to the real estate market overall, at least initially. Over time, however, consistent rate hikes would increase the cost of debt, potentially deterring future transactions and potentially lowering property values. In multifamily, specifically, lending activity remains robust relative to other types of bank lending such as commercial real estate, and liquidity is expected to remain fluid based on strong demand from investors – foreign and domestic.

Federal Reserve

What’s more, competition will likely remain heated between GSEs and private banks through lending rates and loan terms. In the single-family market, mortgage rates are expected to gradually rise, though rates are already at historic lows. Those seeking to buy a home may be incentivized to purchase sooner than later.

Fed Funds

 

While the move is an indicator of overall confidence in the U.S. economy, the Fed is expected to continue to exercise caution as greater risk persists in the global economy. Many central banks have kept their interest rates near zero (or below zero in some instances). Moreover, the move will provide the Federal Reserve ammunition should economic conditions deteriorate. Over the next year, many observers expect the Fed Funds rate to gradually rise between 0.75 percent and 1.0 percent by the end of 2016. For more on news in the apartment market, see the latest from our team at MPF Research.


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