Federal Reserve Raises Interest Rates for 10th Consecutive Time

As anticipated by many, the Federal Reserve’s policy-making committee voted on Wednesday to raise its target interest rate by 25 basis points, marking the 10th consecutive increase in its most aggressive monetary tightening campaign in four decades.

The new target rate is now set between 5% and 5.25%, the highest level since September 2007. This decision was unanimous among committee members.

In its statement, the committee acknowledged the continued uncertainty surrounding the impact of tighter credit conditions on the broader economy, echoing sentiments from its March meeting. However, the previous language suggesting that “ongoing increases” may be necessary was removed, indicating the possibility of a pause in future rate hikes.

During his post-meeting press conference, Federal Reserve Chairman Jerome Powell highlighted several challenges, including the effects of the Fed’s rate hikes and the recent banking turmoil, both of which are contributing to the slowdown in economic activity. Powell emphasized that future decisions will be data-driven and evaluated on a month-to-month basis as conditions evolve.

The rise in interest rates further constrains an already tight credit market. Each increase in the Fed’s policy rate leads to banks tightening lending conditions, reducing the amount of credit available for commercial real estate and other business loans, while simultaneously raising borrowing costs.

As a result, the commercial real estate market is facing significant challenges, with transaction volume down 55% compared to the first quarter of 2022. However, this slowdown has not impacted all property types equally. Industrial assets, for example, saw capital inflows that exceeded pre-pandemic levels, and while investment in retail and hospitality sectors continues, it has slowed. In contrast, office and multifamily investments have seen substantial declines.

Recent data also indicates broader economic weakening. Factory output has contracted for six consecutive months, and the services sector, which peaked in late 2021, has slowed considerably. The housing market, highly sensitive to interest rate changes, has experienced a sharp decline in sales since early 2022 as mortgage rates have surged, severely affecting affordability.

While the labor market remains relatively strong, there are signs of softening, including a drop in job openings since March 2022, slower job gains, and rising unemployment claims. Additionally, consumer spending, a key driver of economic activity, stagnated in real terms by the end of the first quarter. Many analysts predict the U.S. economy will enter a recession later this year.

Despite these signs of economic slowdown, Powell reaffirmed that the Fed’s primary focus remains curbing inflation. He has previously emphasized the importance of “supercore” inflation, which excludes food, energy, and housing services from the personal consumer expenditures (PCE) price index. This measure has remained stubbornly high, fluctuating between 4.2% and 4.7% since August 2022, suggesting it is less responsive to rate hikes. Powell attributes its persistence to a robust labor market and wage growth, reinforcing the need for ongoing monetary restraint.

Impact on The Seattle Real Estate Market

The interest rate hikes are significantly affecting Seattle’s real estate market. Higher borrowing costs have led to reduced affordability for homebuyers, causing a slowdown in both residential and commercial property transactions. As mortgage rates rise, many potential buyers are priced out of the market, leading to a drop in home sales. In commercial real estate, the reduced availability of credit is contributing to fewer deals being made, particularly in office and multifamily sectors. However, sectors like industrial real estate may continue to attract investment due to Seattle’s strong demand for logistics and tech-driven industries. Overall, the higher interest rates are likely to dampen real estate activity in Seattle for the foreseeable future, especially if economic conditions worsen.