Federal Reserve Raises Interest Rate 25 Basis Points, With 6 More Increases On Tap This Year

The Federal Reserve's anticipated interest rate hike officially arrived on Wednesday, the first of seven anticipated increases this year as the institution attempts to firm up its monetary policy amid global upheaval caused by Russia's ongoing invasion of Ukraine.

The increase came in at 25 basis points, bringing the federal interest rate to one-half of 1%, with the subsequent increases expected to be of similar size. The Fed also adjusted its projections for the economy downward from its December numbers in anticipation of the conflict's downstream effects. In a virtual press conference accompanying the announcement, Fed Chair Jerome Powell stressed the uncertainty that has become the overarching theme of the past two years, as well as the Fed's ability to change course at any of the next six meetings this year when the Federal Open Market Committee decides the federal interest rate.

"Before the invasion of Ukraine by Russia, I would have said that the expectation was that inflation would peak sometime in the first quarter, maybe the end of the first quarter of this year," Powell said at the conference, citing rising oil prices and further supply chain issues as chief side effects of the invasion. "That could actually push out the relief we were expecting on supply chains generally. So I guess I would say that the expectation is still that inflation will begin to come down in the second half of the year."

If this year will indeed see seven hikes of 25 bps each, the federal interest rate will rise from 0.25% to 2% within a year, which Powell characterized as a stable rate for long-term economic growth. But it might be too much, too soon for the commercial real estate industry, which only projected four rate bumps in 2022, according to reports from credit rating and analytics firm Moody's and international law firm Seyfarth Shaw's real estate practice.

"The real estate industry contemplated a 0.25% increase in March," Seyfarth partner and head of its Washington, D.C., real estate practice Ron Gart told Bisnow. "The outlook is changing in that originally the thought was there would be up to four increases, and now there is much discussion around either more increases or greater increases for the foreseeable future."

Real estate's reputation as a hedge against inflation has been trumpeted by industry voices in the last few months, but interest rate hikes inherently make obtaining debt for transactions more expensive. Tightening the screws too much risks puncturing what has become a historically strong period for real estate valuations and transaction volume, which Moody's attributes partially to those very same inflation concerns.

"The idea that commercial real estate is an inflation hedge will be put to the test now," the Moody's report read.

The Fed will also begin trimming its balance sheet of securities and federal agency mortgages at the next meeting in May, according to its announcement. Powell used the prospect of that balance sheet runoff to answer a slew of questions about the extent of the Fed's ability to slow down inflation without throwing the economy's growth in reverse, while also denying that the FOMC had committed to the timing of the sell-off.

"People do the math different ways, but the shrinkage of the federal balance sheet might be the equivalent of another rate increase," Powell said. 

With inflation having spun out of control by the time the Fed altered course, Powell defended the financial body's initial attempts to let the economy's growth play out as long as possible.

"The help we and other forecasters have been expecting from labor force participation, supply-side bottlenecks, all those things getting better — it hasn't come," Powell said at the conference. "If we knew that was going to happen, then yes, it would have been appropriate to move [the interest rate] earlier. But we don't have that luxury."

Powell also cited the current 3.5% federal unemployment rate and a projected 2.8% growth of the country's gross domestic product both to defend the Fed's policy choices and offer reassurances about the impact of higher interest rates.

"We feel like the economy can handle tighter monetary policy," Powell said.