Interest rates continue to be the story in the current economy. The Fed met on September 20, 2023 to determine if another rate increase was warranted. They took no action and left the Federal Funds rate at 5.5% for now.
Chairman Powell indicated there was not a need for an increase at this time given the substantial increases that have occurred over the past 18 months. In total, the Fed has increased rates 525 basis points over that time period. These increases have tested market resilience, most notably in the regional banking sector as well as commercial real estate. However, Fed officials did state that rate increases would remain longer than previously believed.
With no way to know what the future holds, markets responded cautiously to the news. Stock markets decreased after the announcement with the Dow Jones Industrial Average down 77 points, or 0.2%, and the S&P 500 decreasing 0.9%. Yields on the 2-year Treasury note rose to 5.118%, the highest level since 2006 according to the Wall Street Journal. Future rate increase projections released at the end of the Fed’s two-day policy meeting showed 12 of 19 officials favor raising rates one more time this year, while seven think they can leave them unchanged. They meet next Oct. 31-Nov. 1 and again in December.
Michael Feroli, chief economist at JPMorgan Chase, thinks the Fed’s July rate rise will be its last for the current cycle. “For Powell, he sounds like he’s pretty comfortable where they are, sitting back, and watching things play out,” Feroli said. The accuracy of this sentiment remains to be seen. Multiple Fed officials have been reticent to call a halt to future increases. Solid economic growth has defied economists’ expectations that it would sag this year, raising questions over whether policy has been as restrictive as officials thought it was.
Rising oil and freight transportation costs have created a worrisome outlook moving forward for some. Increased fuel and freight expenses could easily ramp inflation up despite historic interest rates. Freezing rate increases prematurely could be particularly disruptive to financial markets if they assume inflation and interest rates have flattened when the opposite may well be the case.
Signs that the economy isn’t slowing have pushed up the yield on the 10-year Treasury note, which has traded this week at its highest level since 2007. The market-determined rate influences an array of borrowing costs, including mortgage rates. The increase, in effect, does much of the work that a Fed rate hike would be intended to achieve by further reducing demand for rate-sensitive purchases such as houses and cars.
With national mortgage rate averages at 7.5%, rental demand continues to increase. Though rent rate increases are slowly beginning to flatten, since the pandemic rent rates have risen as much as 22%. Demand remains strong for multi-family rentals and KeyCity Capital maintains a bullish outlook in this sector.