Fed Raises Rates
The Federal Reserve announced on May 3rd, 2023, its widely expected quarter-point interest rate hike. This hike marks the 10th consecutive increase, bringing the federal funds rate to a range of five percent to 5.25 percent. The decision was unanimous, and the Fed signaled that it may pause additional increases.
With the most recent rate hike, the federal funds rate is now at a 16-year high. The FOMC has raised the rate by 75 basis points since the start of 2023 alone.
Read on to see what this means for the economy’s health for the remainder of 2023.
What to Expect
The FOMC statement removed language suggesting additional policy firming, instead saying that officials will study how the economy, inflation, and financial markets behave in the coming weeks and months before deciding on future policy.
While some speculated that recent banking failures, such as Silicon Valley Bank and First Republic Bank, might prompt the Fed to pause rate hikes, the Fed appears to be maintaining its “hawkish” stance. The Fed plans to shrink the balance sheet each month by as much as $60 billion for U.S. Treasuries and $35 billion for mortgage-backed securities to help slow inflation by draining liquidity from the financial system.
Although the labor market is still tight, there are indications that it may be starting to loosen up. The rate of job postings has been dropping, and job openings are slowing while continuous claims for unemployment benefits are increasing. Furthermore, even adjusted for inflation, consumer spending stagnated by the end of Q1 2023. As a result, most economists believe the economy will enter a recession later this year.
Impact of the Hike
This decision further tightens an already restrictive debt market as banks reduce lending amounts and raise costs in response to the Fed’s policy rate hikes. This market slowdown does not affect investment activity across all property types equally. Capital continues to flow into industrial, retail, and hospitality assets, while office and multifamily assets see significantly reduced allocations. Economic data indicates that the economy is slowing, with factory activity contracting and the services side of the economy slowing significantly.
Takeaways
Overall, the Fed’s decision to raise interest rates is consistent with its efforts to manage inflation and stabilize the economy. It remains to be seen how the economy will respond to the rate hike and whether additional increases will be necessary in the future. However, the Fed’s cautious approach suggests that it is closely monitoring the situation and will take appropriate action as needed.
