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Increasingly Upbeat Fed Raises Rates, Projects More Rate Hikes This Year and Next

Fed Forecasting a Total of Four Rate Hikes in 2018 Instead of Three as Previously Expected
June 14, 2018
In an uncommonly straight-forward and optimistic statement, Federal Reserve Chairman Powell said, "The economy is doing very well," in his opening statement at the press conference following the two-day meeting this week of the Fed’s interest-rate-setting committee.

At the meeting, the Fed decided to increase its key interest rate by a quarter point, to a range of 1.75 percent to 2 percent.

It also shifted its rate projections for 2018 and 2019 higher to 2.4 percent at the end of this year and 3.1 percent at the end of 2019. This means that the committee is now forecasting a total of four hikes in 2018 instead of the three that it had previously expected.

The Fed’s decision did not come as a surprise. Economic data released in the past few weeks has been solid, indicating a pick-up in consumer spending, robust business investment and a strong labor market. In addition, consumer price inflation has moved closer to the Fed’s inflation objective. All in all, it is a perfect setting for tighter monetary policy.

The Fed also revised higher its expectations for economic growth and inflation this year, and lowered its forecast for the unemployment rate. Higher government spending, rising incomes and confidence, continued economic growth abroad and accommodative financial conditions are all boosting economic growth, according to the Fed.

However, it continues to anticipate a slowdown in economic growth next year and in 2020, as the effect of tax cuts wears off and borrowing costs increase.

In his press conference, Powell was asked twice about risks from rising trade tensions with U.S.’s main trading partners. While acknowledging that some businesses may be putting off investment and hiring decisions in response to the heated trade rhetoric, he emphasized that, so far, the data has not shown any economic impact.

Also, the Fed has nothing to do with those policies and trade decisions are the domain of the executive branch, he added.

Wall Street reacted predictably to the Fed’s rate decision and language: Short-term bond yields rose, interest rate-sensitive stocks (REITs, homebuilders) declined and the dollar appreciated slightly.

While higher interest rates may be a headwind for commercial real estate, this is tempered somewhat for two reasons. First, the Fed didn’t meaningfully change its longer-term view of where rates are going, only the pace at which they would get there.

Second, the Fed is planning to raise rates because the economy is doing well and the labor market is stronger, which is supportive of real estate fundamentals.

It’s too early to know how Main Street will respond to higher rates. Will consumer and business spending pull back as paying off debts becomes more expensive? Will economic optimism fades? Will people put off buying a house as mortgage rates increase?

All of these answers should begin to become apparent in the coming weeks and months.

Galina Alexeenko, Regional Economist  CoStar Group   

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