The Federal Open Market Committee (FOMC) raised its benchmark federal funds rate by 25 bps at its meeting today, to a range of .75 to 1 percent. The move came significantly sooner than was previously expected, especially considering that at the beginning of the month, markets predicted roughly a one-in-four chance of a rate hike happening.
Today’s action has heightened anticipation there will be at least three rate hikes in 2017, with the next two likely coming when the committee meets again in June and September. Market forecasts call for rates to rise by three-quarters of a percentage point by the end of 2017, on their way to a 3 percent long-term goal.
Source: J.P. Morgan Markets, as of March 10, 2017
The Fed’s decision to move away from the accommodative stance it’s taken since the 2008 financial crisis is a sign of confidence in the economy’s strength. The decision to hike rates sooner than originally anticipated was prompted by above-trend job growth, among other encouraging market indicators. The Fed’s adjustments will help to secure the longevity of the current expansion, which is already the third longest stretch of growth in US history.
March’s rate hike demonstrates that the Fed is inclined to normalize interest rates before inflation picks up and forces action. In her February 14 testimony before the Senate Banking Committee, Fed Chair Janet Yellen backed up the FOMC’s commitment to a gradual approach, saying that “waiting too long to remove accommodation would be unwise, potentially requiring the FOMC to eventually raise rates rapidly, which could risk disrupting financial markets and pushing the economy into recession.”
Regardless of today’s hike, rates remain historically low. Yields on 10-year Treasurys have been on a downward trend for more than 30 years.
Source: The Federal Reserve
This rate increase, and any upcoming hikes, should instill confidence in commercial real estate investors. The Fed has been very hesitant to raise rates—so the fact that they’re moving to raise rates signals that the economy is on strong footing. And when the broader economy does well—with job growth, higher wages and expanding businesses—commercial real estate investors also succeed.