HomeReal EstateMarket PulseFed Raises Interest Rates as Inflation Continues to Heat Up

Fed Raises Interest Rates as Inflation Continues to Heat Up

The Federal Reserve on Wednesday raised interest rates for the first time since 2018, with a 0.25% uptick. The Fed’s policymakers also projected an additional six interest rate hikes over the course of 2022. Fed chair Jerome Powell indicated that the change was largely a response to the current high levels of inflation, which are at 40-year highs

According to Powell, “The economy no longer needs — or wants — this very highly accommodative stance.”

The Fed decided to keep interest rates low in the wake of the pandemic-induced recession. Low-interest rates are typically useful in downturns, as they are meant to incentivize investment and economic recovery. The Fed’s recent plan to raise interest rates several times throughout the year is meant to curb inflation, but what, if any, implications does this have on the economy, stock market, and real estate market?

How the Markets Responded

Despite a volatile day of trading, U.S. stocks and bond yields increased on Wednesday, March 16th after the Federal Reserve announced it would officially raise interest rates for the first time in four years. The stock market usually takes a hit when interest rates rise, but this time the market reacted differently this time. 

Andrew Hiesinger, CEO of Quant Data, told Fortune that the markets responded positively because investors see the move as a positive development for the economy. “Usually, the stock market is reflecting what’s best for the economy, so if interest rate hikes are best for the economy, then stocks will respond to that,” according to Hiesinger. 

Chairman Powell also believes in the American economy’s ability to perform well, despite the rate increases that some may see as too restrictive. Mike Loewengart, managing director of investment strategy for E*Trade, told CNBC that “monetary tightening means the Fed believes the economy is on solid footing, which is a good thing at the end of the day.” 

The Implications for the Real Estate Market

It’s not entirely certain how the Fed’s plans to raise interest rates will affect the housing market, but mortgage rates will likely climb higher as a result of the new economic measures. Mortgage interest rates tend to move in tandem with the 10-year treasury yield, which is highly influenced by the Fed’s rate. 

According to Freddie Mac, interest rates on a 30-year fixed-rate mortgage averaged 4.16% as of the week ending March 18th. Interest rates on the 30-year FRM haven’t been this high since April 2019. 

If mortgage interest rates continue to increase as they are expected to, the housing market will likely cool down as a result. This may seem like good news to homebuyers who are increasingly priced out of the market, but higher interest rates lead to higher borrowing costs, which places another burden on buyers. Real estate experts largely blame skyrocketing prices on a shortage of available inventory, so the housing market may not normalize until supply can meet demand.

Tyler graduated from Virginia Commonwealth University in 2017 with a Bachelor's degree in Urban and Regional Studies. Currently based in Los Angeles, he works as a freelance content writer and copywriter for companies in real estate, property management, and similar industries. Tyler's main professional passion is writing about critical issues affecting big and small cities alike, including housing affordability, homelessness, inequality, and transportation. When he isn't working, he usually plans his next road trip or explores new neighborhoods and hiking trails.