Yesterday the Federal Reserve raised the short-term interest rates by half a percentage point in an effort to combat the rampant inflation we’ve been seeing. This has, understandably, freaked a lot of people out. And it’s true, there will be some negative repercussions in the interim while the market re-stabilizes itself. The pandemic and a variety of other factors created the perfect storm of unpredictable highs and lows. This effort by the Fed is meant to undercut inflation and keep the economy on an upwards trend. Here’s what we may see in the coming months:
Stabilizing prices. The purpose of this increase by the Fed was to help stabilize the economy and stave off further inflation, which is ultimately a good thing. The rate at which things were appreciating (hello, home prices?!) was unsustainable and would have eventually priced regular people out of the market. Chair of the Federal Reserve, Jerome Powell said in the press conference following the announcement that we could expect a soft landing with inflation coming back down to the target range of 2% without a crash or recession. He also alluded to there being evidence that inflation may have reached its final peak.
Higher borrowing costs. Unfortunately, interest rates are finally going back up to pre-pandemic levels, which was a necessary evil for re-stabilizing the economy. However, the increased cost of living now coupled with high interest rates has sidelined many buyers who can’t afford the increased prices and increased interest rates.
The Federal Funds rate will continue going up through this year. This isn’t the end of the Fed’s rate hikes for this year. The goal is to raise the rate to 2.5% or higher by the end of the year. To put this in perspective, the rate was between 0% and 0.25% from March 2020 to March 2022 and is currently between 0.75% and 1%.
All in all, we may be looking forward to a difficult year, but necessary adjustments are being made to ease into these changes that will hopefully result in a stronger economy and a normal real estate market.