Strong economic growth supports rise in rates

A strengthening labor market and rising economic activity supported the move by the Federal Open Market Committee to increase the target range for the federal funds rate to 2.00–2.25 percent at its meeting Sept. 25–26.

Second-quarter GDP growth in the United States was 4.2 percent, according to the third estimate from the Bureau of Economic Analysis, and corporate profits increased $65.0 billion. In addition, the unemployment rate was 3.9 percent in August, according to the Bureau of Labor Statistics, and the U.S. economy added 201,000 jobs.

With “roughly balanced” risks to the economic outlook, the FOMC expects “further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the committee’s symmetric 2 percent objective over the medium term.”

This is the third increase in rates in 2018, with many expecting a fourth increase by year-end. A rising interest rate environment could have significant effects on commercial real estate.

Notably, the FOMC is no longer taking an “accommodative” stance with regard to its policy path, and some took that to mean the Fed is nearing the end of its rate-hiking cycle. However, predictions from the committee on future rate rises suggest rates will increase through 2020, with some subsidence in 2021.

And, in a press conference after the results were released, Fed chair Jerome Powell addressed the removal of the phrase from the official statement: “The change does not signal any change in the likely path of policy. Instead, it is a sign that policy is proceeding in line with our expectations.”