The Fed freezes interest rates again… Is it just an illusion?

New York skyline

The Federal Reserve recently dashed expectations by holding interest rates. The US central bank has effectively frozen rates since 2008, helping the economy weather the storm of one of the most serious crashes in living memory. But with economic indicators pointing the way towards not only recovery, but stability, the question has become not if but when the Fed will take the plunge and raise interest rates.

Clearly June was not that moment. The Fed’s Open Market Committee opted to maintain the status quo and gave little away regarding its future plans, blandly describing economic activity as “expanding moderately.” However, Federal Reserve officials have since then teased market experts over the timing of an interest rate increase. Fed Governor Jerome Powell recently indicated to the Wall Street Journal that the chances of a September announcement are “50-50.” Plotting a more extensive road map, Federal Reserve Bank of San Francisco President John Williams has predicted two increases before the end of 2015 of 0.25% each. You can be sure that market analysts will carefully pore over the Fed’s July policy statement for any hint or indication for their plans ahead.

Fed Reserve

Although the hike appears inevitable, it is not yet a done deal. In fact, it could be further off than some think. Quite clearly, despite the general feel-good factor of an economy on the mend, there are a whole range of fiscal considerations to contend with. The relatively strong performance of the dollar has complicated matters, as it brings with it a slowdown in US exports. Meanwhile, GDP growth is sluggish, disappointing the Fed’s hopes – Experts are anticipating overall 2.5% growth for 2014, compared to 2.4% in 2014. It’s enough to excite Administration officials scouring for evidence of continued growth, but is unlikely to satisfy those in the business of crafting real monetary policy.

All of this might lead you to think that the Fed should bide its time before racking up interest rates for the first time in seven years. That’s certainly the view of Morgan Stanley’s Jim Cannon, who expects the central bank to “keep rates lower for longer, but when it comes time to hike, hike faster.” Yet, there are those who worry that the Fed has already left things too late. Popular analyst Jim Paulsen of Wells Capital Management says that they may have missed the boat. Growing corporate revenue has traditionally given the Fed a bulwark to soften the blow of an interest rate increase. However, with earnings flat-lining and profits now typically decreasing, he says that “the Fed is now about to begin the process of raising interest rates without its traditional buffer of recovering profitability.”

The experts will no doubt continue to bicker. But the conflicting analyses prior to a hike only increases the uncertainly of what an interest rate increase might bring. Goldman Sachs President Gary Cohn is man who you would think might have a pretty good idea what the market implications might be. And yet, by his own candid admission, “We’re probably less ready than people think.” In fact, says Cohn the only thing you can really expect, is the unexpected. He commented, “It won’t at all be surprising to me if there are some interesting market reactions… When it does happen, it’s usually not the first-derivative event that people are caught off guard by… They’re caught off guard by the second-, third- and fourth-derivative events.”

 

One thing we know for sure though, is that raising interest rates will have a profound effect on the housing market. The experts may be undecided regarding the Fed’s intentions, but homebuyers appear to have made their minds up. Online real estate company Redfin has recorded a whopping 40% jump in requests for home tours in comparison to last year and a 33% leap in signed offers. However, the expectation of raised interest rates cannot alone explain such enthusiasm to buy. This is clearly a confident market and the economic recovery does appear to be having a tangible impact when it comes to property. In May, first-time buyers catapulted sales of previously owned properties to their highest level in the US since 2009. Already bullish property sales coupled with an imminent rise in interest rates is likely to see a swift increase in property values, thanks to the burgeoning demand. But, will the trend continue? Traditionally, a hike in rates has led to an eventual drop in sales due to the extra mortgage pressure. The long-term impact could look somewhat different from the initial boost.

Interest Rate

However, the murky predictions should not phase New York real estate investors. The Big Apple pretty much plays by its own rules. There are few, if any cities in the world which can compare when it comes to demand. And as a result, New York prices continue on a single, upward trajectory. In fact, 2014 saw prices soar to a record $1,297 average per square foot. The Fed’s interest rate deliberations will be closely followed on Wall Street, but in the rest of the city, property trends will most likely continue unabated. There is of course the possibility that some owners will find an interest rate hike tough to contend with and feel the need to sell. This will only free up at least some inventory in a city where property is at a premium, signifying yet more opportunity for investors. Whatever happens, the New York market will continue to represent a lucrative prospect. In short, the interest rate saga will continue to rumble, but in New York it’s business as usual.

Posted on July 20, 2015 in News, Real Estate

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