Fed Hikes Interest Rates By 0.75%, And Powell Says It Could Do It Again
The Federal Reserve raised interest rates again Wednesday as part of its strategy to rein in historic inflation by increasing the cost of borrowing.
The Fed increased the federal interest rate by 75 basis points in the largest interest rate increase since 1994. With the increase, the Federal Reserve's federal funds rate will rise to between 1.5% and 1.75%, The Wall Street Journal reported.
The Federal Reserve raised rates by half a percentage point last month, but it hasn’t had the desired effect so far. Data from the U.S. Bureau of Labor Statistics found that inflation was up again in May and increasing at its fastest rate since 1981, indicating that its peak hadn’t been reached.
Although bemoaned by those looking to buy property or take out a loan, the announcement appears to have been welcome news on Wall Street, where all three major indexes jumped slightly by the closing bell. The Dow Jones in particular broke a five-day losing streak, closing up 1%.
Commercial real estate has often been held up as a hedge against inflation, but many industry watchers are anticipating that these conditions will put that reputation to the test. Deal volume has slowed, but investors don’t seem to be abandoning ship so far.
Rising inflation and interest rates along with high gas prices and geopolitical turmoil have raised fears of a recession, with some drawing comparisons to the dot-com bust of the early 2000s.
In a virtual press conference Wednesday, Federal Reserve Chair Jerome Powell said that the increase was “an unusually large one,” motivated by the stubbornness of inflation. He said another rate hike of 75 basis points is possible next month.
“Inflation surprised to the upside,” Powell said. “Further surprises could be in store.”
The rate hike affects the federal funds rate, which in turn impacts other kinds of borrowing, from construction loans to mortgages and more.
National Association of Realtors Chief Economist Lawrence Yun said that while the rate has risen by just 1.75% overall, the rate of a 30-year fixed-rate mortgage has risen by nearly 3% since the hikes began earlier this year.
“On the same $300,000 mortgage, the monthly payment has risen from $1,265 in December to $1,800 today. That’s painful and, consequently, will shrink the buyer pool,” Yun said in a statement. Yun predicted home sales would fall until inflation slows and rates stabilize.
“In the meantime, rental demand will strengthen along with rents,” Yun said.
The Federal Reserve’s continued reduction of its balance sheet, which includes its mortgage-backed securities holdings, is another factor that’s pushing mortgage rates up, Mortgage Bankers Association Senior Vice President and Chief Economist Mike Fratantoni said in a statement.
Origin Investments principal Michael Episcope said that while he is seeing multifamily valuations start to adjust for these changes and deals sputter out as the cost of money increases, he wouldn’t classify these responses as dramatic.
“This isn’t 2008 or 2009 all over again,” Episcope said.
Episcope’s company invests in multifamily building, buying and lending. He said that right before the onset of the pandemic, his company stopped buying existing properties.
“We were starting to see stabilized properties approach or surpass replacement costs,” Episcope said. “Think about buying a value-add property that’s 12 to 15 years old at the same price that you can build it for today, but then you have to put in $20k per unit in the value-add and then you have to sell it to make a profit. The calculus didn't really make sense to us.”
He hasn’t bought a stabilized building in nearly three years as demand for multifamily has significantly pushed the prices of existing projects up to levels he doesn’t expect to see sustained.
"For us, these distortions in the market, where you have 25-year-old properties trading above replacement costs, that will not last for long. And I think the people who are buying those properties today and who bought them in the last year are going to end up getting hurt.”
While the Fed's Powell said that he doesn’t expect a hike as large as today’s to become common, he did not set limits or ranges for future increases.
When asked how high the federal funds rate needed to go, Powell told the audience at the press conference, “We’re going to find that out empirically … keeping our eyes open, reacting to incoming data.”
UPDATE, JUNE 15, 3:44 P.M. ET: The story has been updated with comments from Powell's press conference and reactions from the real estate industry.
UPDATE, JUNE 15, 8:03 P.M. ET: Information about how the stock market responded to the announcement has been added to the story.
