Commercial Real Estate

Is Interest Rate Normalization the New Normal?

With today’s announcement of a 25 basis points (bps) rate hike, the Federal Reserve has officially picked up the pace of its interest rate normalization program. 
Al BrooksHead of Commercial Real Estate, Commercial Banking
March 15, 2017

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.

J.P. Morgan Markets Interest Rate Forecast
 

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.

10-Year Treasury Yields Remain Low
 

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.

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© 2017 JPMorgan Chase & Co. All rights reserved. Chase is a marketing name for certain businesses of JPMorgan Chase & Co. and JPMorgan Chase Bank, N.A., Member FDIC. The material contained herein is intended as a general market and/or economic commentary. Any views or opinions expressed herein by Al Brooks are solely those of Al Brooks and do not reflect the views of and opinions of JPMorgan Chase & Co. or its affiliates. This information in no way constitutes J.P. Morgan research and should not be treated as such. Further, the views expressed herein may differ from that contained in JPMorgan Chase & Co. research reports. The information herein has been obtained from sources deemed to be reliable, but JPMorgan Chase makes no representation or warranty as to its accuracy or completeness.
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