As markets await the Federal Reserve's decision regarding future interest rate moves this week, REITs are poised for a potential drop in share price should the Fed boost short-term rates as expected.
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The Federal Open Market Committee will meet Tuesday and Wednesday to discuss economic trends, the tight labor market and whether fiscal stimulus will force regulators to raise rates at a faster clip than initially forecast. The Fed is expected to raise short-term rates by 25 basis points to between 1.5% and 1.75% this month, National Real Estate Investment Trust reports.
Initially, Fed governors planned to raise rates three times this year, twice in 2019 and another two times in 2020 to allow for a gradual increase. However, recent tax cuts, healthy economic growth and the 17-year low unemployment rate may force the Fed to boost rates quicker to manage inflationary pressures.
In order to regulate the economy, the Fed needs to ensure rates do not rise too quickly or too slowly. The former could damage employment and investment opportunities, while the latter could lead to an asset bubble, according to the Wall Street Journal.
Investor reaction to a possible fourth rate increase could cause many REIT stock prices to drop, NAREIT reports. But while REIT performance will likely take a hit in the short term, experts say REITs will remain a solid investment for long-term returns for the next few years. Despite periods of market volatility, REITs have proven to be a reliable investment for those willing to hold on to stocks for the long term.
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