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Fed Raises Interest Rates, CRE Shrugs It Off

As expected, the Federal Open Market Committee of the U.S. Federal Reserve increased its key short-term rate on Wednesday from a range of 1.75% to 2% up a quarter point to 2% to 2.25%.

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Federal Reserve Chairman Jerome Powell.

The Fed cited the strong U.S. economy as the reason for the third interest rate hike of the year. "Economic activity has been rising at a strong rate," the central bank said in a statement

"Job gains have been strong, on average, in recent months, and the unemployment rate has stayed low. Household spending and business fixed investment have grown strongly," the Fed said.

The FOMC vote to raise interest rates was unanimous. The rate is now the highest it has been since before the panic of 2008 that ushered in the recession, but historically not that high.

The move was widely anticipated and considered unlikely to affect the growth trajectory of most real estate sectors, even though it does make borrowing more expensive.

“With stronger GDP growth comes higher inflation, and we expect the Fed will respond," Cushman & Wakefield Americas Head of Research Revathi Greenwood said earlier this month. 

"And while a higher interest rate environment creates more nuances for capital markets, in general, the outlook signals that commercial real estate values will continue to rise," Greenwood said. "There’s momentum behind the current expansion, and it would take a major shock to derail it.”

The Fed also signaled that it will probably raise rates again in December, but did not use the word "accommodative" to describe its policy actions. Among Fed tea-leaf readers, that probably means that the Fed will consider slowing down the pace of rate hikes in 2019.