Is The Fed Confused or Am I?
Welcome to the Real Estate Espresso Podcast, your morning shot of what’s new in the world of real estate investing. I’m your host, Victor Menasce. On today’s show, we’re looking closely at yesterday’s Fed interest rate announcement. The Fed cut the benchmark lending rate by a quarter point as widely predicted and as I predicted only a few weeks ago on this show.
As real estate investors, we care deeply about what happens to interest rates. The cost of capital is one of the most significant variables when it comes to owning real estate assets. This rate announcement was as confusing as ever with numerous mixed messages. The outlook for future rate-setting policy could not be more unclear. It’s as if the narrative and the data are disconnected.
On the one hand, Fed Chairman Powell stated the economy strong and unemployment is falling. On the other hand, continuing jobless claims are growing. And on the other hand, yes the the Fed needs three hands, inflation is showing signs of creeping up.
Once all of these revisions hit the headlines, we’re likely to see that the employment was actually declining in the U.S. since April of last year. The average monthly job creation reported by the Bureau of Labor and Statistics is not a job gain, it’s actually a net job loss.
For those who are unemployed, the average time to finding a new job keeps getting longer and longer. It now stands at 23.7 weeks. That’s up from 19 weeks at the same time last year. So why does any of this matter? Well I’m glad you asked.
If the economy is in recession and people are getting laid off and can’t find a new job, then the Fed will have to employ a stimulative monetary policy. That means cutting interest rates. And for now, even with 100 Basis Point rate cuts so far since September, Chair Powell stated that the policy stance was still pretty restrictive.
So they cut interest rates by a quarter point this week, and they forecast only two quarter-point rate cuts next year down from four. Inflation data is showing that the housing market is cooling off. I believe the Fed is on the wrong side of history, at least their speeches and narrative are not matching their own data. I also believe that we’re going to see a more aggressive rate policy after these data revisions are published.
The bond market responded this week by bumping up the rate for the 10-year treasury. This will put pressure on real estate investors in the short term. I believe Q1 will see more downward pressure on interest rates once the data emerges. As you think about that, have an awesome rest of your day. Go make some great things happen. We’ll talk again tomorrow.
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