Three Reasons Why a Fed Rate Hike Will Impact the Housing Market

 

The Federal Reserve (Fed) recently raised its benchmark interest rate by three-quarters of a percentage point. The move comes as inflation is at a 40-year high. The rising costs of borrowing are weighing on consumer spending and mortgages. The following are three reasons why rising interest rates will negatively impact the housing market:

Fed raises benchmark interest rate by three-quarters of a percentage point

The Federal Reserve has raised interest rates by 0.75 percentage point in order to slow the pace of inflation. The decision was announced March 10 at 4:15 a.m. PT. It is the biggest increase since 2000, and the central bank is committed to achieving its goal of two percent inflation. This hike will help to ease the pressure on prices and to slow the economy. While the timing is not yet clear, this decision is likely to be seen as a 'tightening' of monetary policy.

As markets began to adjust to the possibility of an aggressive Fed rate hike, the S&P 500 dropped about 7% between last Thursday and Tuesday. The 30-year fixed-rate mortgage rose 0.75%. Economists expect the Fed to increase rates several times this year. As a result, many people will see an increase in borrowing costs, making even essential purchases more expensive. Thankfully, there is some sanity in all of this.

Inflation is at 40-year high

Inflation remains at a forty-year high despite the recent hike in interest rates by the Federal Reserve. As a result, the world is preparing for a potential downturn as the global economy continues to tighten its credit. Last week, the World Bank warned of the danger of a "stagflation" scenario - slow growth with high inflation. Despite these concerns, the Fed has indicated it could raise the key interest rate to 3.25% by the end of 2022. This is a higher estimate than what policymakers had predicted just a few weeks ago. Inflation is now higher than the neutral rate of 2%. A year ago, the Fed was expecting rates to be raised to about 1.75% - which would still be below its target of 2%.

Recent surveys indicate that expectations of inflation are rising, which could fuel higher prices. Inflation expectations are rising because people are expecting the prices to increase. And when people expect higher prices, they may accelerate large purchases. This would further intensify the demand and raise inflation. This could potentially lead to a recession if the series of rate hikes is accelerated. As such, the Fed should be careful to avoid a recession if inflation keeps rising.

Rising interest rates dampen consumer spending

A recent Fed rate hike has raised interest rates for savings accounts, home equity lines of credit, and consumer loans. These rates will rise in lockstep with the federal funds rate. This is not a great news for borrowers. Consumers, however, should use the interest rates as a tool to reduce their credit card spending. If interest rates remain high, spending will slow. But consumers should not fear too much - the risks of too high interest rates are small.

Some consumers will see the effects of a rate hike immediately on their credit cards and home equity lines of credit. A 0.25 percentage point increase in interest rates may not feel like much, but a series of rate increases could cause greater strain on borrowers' finances. Rising interest rates could dampen consumer spending, resulting in reduced consumption of non-essentials like restaurants and groceries. And the consequences for businesses are similar.

Increase in borrowing costs affects mortgages

The recent Fed rate hike has sent interest rates skyrocketing, with the two-year Treasury note yield rising nearly a half-percent to 3.3%. The 10-year Treasury yield is at 3.4%, up half a point since last week. Those high rates will eventually affect mortgage rates. And while this increase won't hit homebuyers too hard, it could put more strain on credit.

The Federal Reserve has recently raised its key interest rate for the first time since the financial crisis. By raising the benchmark short-term rate, policymakers hope to temper persistent inflation. With prices rising at the fastest pace in 40 years, inflation is wiping out wage increases, and many Americans are struggling to meet basic needs. While it will certainly increase the cost of borrowing, the Fed's action will help the economy remain stable. After all, the unemployment rate is near its lowest point since the financial crisis in 2008.

Impact on business investments

The latest interest rate hike by the Federal Reserve has many businesses worried. Although most economists expected this increase, many are still not sure how it will affect their business. It's likely to gradually increase the federal funds rate through the remainder of 2018.

A rate hike by the Federal Reserve will increase the cost of borrowing for most businesses. The higher interest rate will push up the cost of credit for less-credit-worthy businesses. Whether you own a small business or run a large corporation, higher borrowing costs will affect your business decisions. However, there are other things to consider before making a decision. In general, higher borrowing costs will affect businesses, especially if your sales are up.