Inflation hovering slightly north of 3%, this week’s Federal Reserve meeting and decision to leave interest rates unchanged was seen by many as inevitable. Inflation has fallen dramatically from its post-pandemic high of 9.1% in 2022 as the Fed raised interest rates and the overheated real estate market stalled.
But it’s still proving to be a stubborn beast that’s difficult to tame, as the economy remains resilient. Therefore, keeping interest rates where they are (the federal funds rate is currently 5.5%) is a hedge against inflation rising again if the Fed later chooses to cut rates.
Is the Fed’s desired 2% inflation rate achievable? How long can the real estate market, now starved of oxygen and under stress, hold out? No doubt these questions are on the Fed’s mind as it tries to balance policy maintenance with economic stimulus.
Lack of inventory is a contributing factor
of Shortage of housing inventory That undoubtedly influenced the Fed’s decision to keep interest rates stagnant. Similar to what happened after the pandemic, lowering interest rates when there is little housing stock in circulation is an explosive combination that causes prices to skyrocket. The same goes for rentals.
With a lack of vacant and affordable housing, many renters are waiting for a break. The unemployment rate is relatively low, hovering below 4%. longest period since the 1960s—bringing about an unstable equilibrium; landlord They hold properties financed at low interest rates so that potential homeowners and investors can stay and continue to rent buildings at high rents.
A more pragmatic approach could be to cut interest rates to coincide with an impending construction boom in Sunbelt cities experiencing dramatic population growth. It is true that the construction of new housing Increased by 5.9% last month Compared to a year ago, builders are more confident.
balancing act
The Fed’s challenge is to limit price increases by keeping interest rates unchanged without causing a rise in unemployment that would push the economy into recession. The Fed is supposed to be politically impartial, but that’s not good in an election year.
Ironically, immigration, another controversial election-related topic, may also have an impact, as more workers will put downward pressure on wage growth, thereby slowing inflation.
“More people entering the country will expand supply and demand,” said Matthew Bush, U.S. economist at Guggenheim Investments. NBC News, says things that most politicians don’t say. He argued that immigrants are more likely to enter the labor force. This means that “the expansion of the supply pool of available workers outweighs the increase in demand for more workers, which drives economic growth and the ability to create new goods and services.” will increase.”
Economics: Hot political topics
There’s no question that inflation and the Fed’s decision to cut interest rates are hot political topics, especially in an election year. The Fed doesn’t want to be caught in the middle, and it certainly doesn’t want to be accused of influencing the election in any way, but that’s likely to happen if it cuts rates too slowly.
President Biden alluded to making it easier to build affordable housing in his State of the Union address, and while access to tax credits and loans will help, lower interest rates will be a big boost in this area. right.
“Any political considerations are consistent with economic goals,” Bush told NBC. “The only thing is they may not want to start the rate cut cycle months before the election cycle, so they probably start the rate cut cycle in June instead of September to avoid getting too close to the election.” I think you would like to.”
Housing loan
Although the 30-year fixed-rate mortgage rate does not match the Fed benchmark, other loans, especially those that many investors choose, include: HELOC Adjustable rate mortgages match the Federal Reserve rate and typically take effect within two billing cycles.
average rate of home equity loan As of March 20th, it was 8.59%. According to Bankrate.comwhile the average HELOC was 8.99%.
final thoughts
For homebuyers and investors, the high interest rates of the past two years have been painful, with many trying to keep interest rates at 7% to 8% as usual due to historical reasons, but rising wages will soften interest rates. I’m looking forward to seeing interest rates double within two years without having to worry about it. This blow has had a huge impact on people’s economic lives.
It looks like we’ll see some rate cuts at least by the end of the year, but they won’t be substantial. Sure, we’ll allow some leeway in mortgage approvals, but no matter who’s sitting in the White House in January 2025, don’t dream of interest rates being 3-4% again.
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