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The Fed is Raising Interest Rates Again

In a two-pronged effort to curb ballooning inflation, the Federal Reserve approved an interest rate increase at .5 percent and unveiled plans to decrease its $9 trillion asset portfolio beginning next month. The moves reflect the Fed’s most aggressive monetary policy tightening in decades, with the goal of quickly decreasing the economic stimulus that has contributed to growing price pressures. 

The last time the Fed hiked interest rates by a half point was in 2000. This time around, the increase will raise the central bank’s benchmark federal funds rate somewhere between .75 percent and 1 percent. For context, the Fed generally raises rates in quarter-percentage-point increments. As far as shrinking the asset portfolio, officials believe that the Fed will be able to passively unload up to $3 trillion in securities over the course of the next few years. 

Real estate has been traditionally viewed as an inflation hedge because while inflation raises prices, it also raises asset value. Yet, with the Fed scrambling to clean up the economic mess that the pandemic left behind, higher interest rates mean that funding for real estate buyers will become more expensive. While the Fed had hoped that the historically-high rate of inflation would wind down by the end of the year, lockdowns in China have worsened supply chain bottlenecks and the economic fallout of the Ukraine crisis is driving up costs.

As the Fed doles out increasingly aggressive measures to patch up their initial miscalculations of how much inflation would rise and dampen economic recovery, real estate investors are left wondering how they will be able to pay for their debt commitments when it comes time for a new loan.

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