On March 14-15, 2020, the Federal Reserve’s Federal Open Market Committee (FOMC) held an emergency meeting in light of the then-blossoming pandemic to cut rates by a 100 basis points to a rate of 0-0.25%.
But now, in light of last weeks Consumer Price Index report which found inflation increased to 9.1% in June 2022, the FOMC moved to raise the nominal interest rate by 75 basis points from a range of 1.50-1.75% to a current rate of 2.25-2.50%.
This marks the fourth increase this year and the biggest consecutive rate hike on record. So far this year, the FOMC raised rates in March (+25 points), May (+50 points), and June (+75 points).
In a prepared statement released at the end of the meeting, the FOMC said:
“Recent indicators of spending and production have softened. Nonetheless, job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures.”
“Russia’s war against Ukraine is causing tremendous human and economic hardship. The war and related events are creating additional upward pressure on inflation and are weighing on global economic activity. The Committee is highly attentive to inflation risks.”
“The Committee seeks to achieve maximum employment and inflation at the rate of 2% over the longer run. In support of these goals, the Committee decided to raise the target range for the federal funds rate to 2.25-2.50% and anticipates that ongoing increases in the target range will be appropriate. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in the Plans for Reducing the Size of the Federal Reserve’s Balance Sheet that were issued in May. The Committee is strongly committed to returning inflation to its 2% objective.”
“Recent indicators of spending and production have softened. Nonetheless, job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures.”
“Russia’s war against Ukraine is causing tremendous human and economic hardship. The war and related events are creating additional upward pressure on inflation and are weighing on global economic activity. The Committee is highly attentive to inflation risks.”
“The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, the Committee decided to raise the target range for the federal funds rate to 2-1/4 to 2-1/2 percent and anticipates that ongoing increases in the target range will be appropriate. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in the Plans for Reducing the Size of the Federal Reserve’s Balance Sheet that were issued in May. The Committee is strongly committed to returning inflation to its 2% objective.”
Ruben Gonzalez, the Chief Economist at Keller Williams, believes that even as interest rates rise, the housing market will continue to come into line with pre-pandemic numbers.
“As the Fed continues to march forward with rate increases aimed at countering inflation, the path for mortgage rates is less well-defined,” Gonzalez said. “Mortgage rates have historically moved closely with 10-year Treasuries; however, over the last several months, the spread between the two has widened by a full percentage point.”
“There are likely several contributing factors to this widening gap. The Fed’s winding down of its balance sheet of mortgage-backed securities has likely played a role,” Gonzalez continued. “Other contributing factors are the perceived risk generated by both rapid home price appreciation, as well as increased pre-payment risk if rates should fall in the next couple of years.”
“The housing market is now slowing down with home sales down 14% in June, and that trend is on pace to continue through July,” Gonzalez concluded. “Home price appreciation has begun to slow and mortgage rates are a primary factor slowing demand for home purchases. Over the next several months, the housing market will be even more in line with pre-pandemic market conditions.”
Rates are indiscriminate and affect everybody across the board. Veena Jetti, the Owner and Founder of Vive Funds, a real estate investment firm, also commented on the FOMC’s announcement.
“This is nothing unexpected or new for seasoned investors. The Fed is trying to combat inflation by raising rates, which interestingly has had little impact in the last several months,” Jetti said. “When inflation is high, more investors will continue to seek investments like income-producing real estate to hedge against inflation.”
Her suggestions as to the next move investors can take to protect against volatility are:
- Size up fixed rate debt
- Leverage lower to add stability
- Buy rate caps to prevent too much movement
- Trend interest rates up on proformas
- Adjust exit projections to expand cap rates
“Rising cap rates and rising interest rates give us the ability to identify and transact on more opportunities,” Jetti concluded. Also, it doesn’t hurt to have cash ready to deploy when these opportunities become available. Investors should have a strong understanding of their blended cost of capital and how to maximize that efficiency.”
Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michael S. Barr; Michelle W. Bowman; Lael Brainard; James Bullard; Susan M. Collins; Lisa D. Cook; Esther L. George; Philip N. Jefferson; Loretta J. Mester; and Christopher J. Waller.