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Real Estate Market Commentary - March 2015
by Peter L. Zachary, MAI, MRICS

The front page of the New York Times March 19, 2015 had an article titled: FED CREEPS CLOSER TO HIGHER RATE THAT MAY NOT ARRIVE FOR MONTHS. It stated: The federal Reserve on Wednesday moved to the verge of raising interest rates for the first time since the economy fell into recession more than seven years ago, even as officials suggested that the Fed might not pull the trigger until well into the second half of the year.

In a statement released after a two-day meeting of its policy making committee, the Fed said it would consider raising its benchmark rate as early as June, and it removed from the statement a promises that it would be "patient."

Yet the Fed tempered that message on Wednesday, including the release of economic forecasts by its senior officials that that the unemployment rate can still fall significantly without setting forth higher inflation. That conveyed an impression that Fed officials may feel less urgency about raising rates so soon.

"Just because we removed the word "patient" from the statement doesn't mean we're going to be impatient", Janet L.Yellen, the Feds chairwoman, said at a news conference after the statement's release. Ms. Yellen said the Fed was not declaring an intention to raise rates in June, although we cannot rule that out.

Her comments suggested that borrowers have a few more months to take advantage of low interest rates on mortgages and car loans, while savers face a few more months of exceptionally meager returns on their low risk investments. And even after the Fed raises its crucial interest rate, borrowing costs may well remain comparatively low well into the future.

Investors celebrated like the recipient of a last minute reprieve. The Standard and Poor's 500 stock index rose 1.2 percent to close at 2099.50. Bond prices also jumped, driving the yield on the 10 year treasury bond to its largest one-day decline since October. The yields fell 0.13 points to 1.92 percent.

Evan A Schnidman, chief executive of Prattle Analytics, which analyzes central bank communications, said the Fed surprised many investors because public remarks of Fed officials over the last year have consistently pointed to an earlier start date for rate increases than the Fedís official statements. "Although they are individually eager to normalize policy, they are collectively reticent about the possibility of raising interest rates prematurely", Mr. Schnidman said.

The march toward higher interest rates may be slow, but it looks all but certain to begin at some point this year. That reflects the Fed's optimism that the economy no longer needs quite as much help from central bank stimulus and a sense of fatigue with the Fedís long-running campaign to encourage faster economic growth.

The forecast published by the Fed showed that 15 of the 17 members of the policy making committee expect to raise the Fedís benchmark rae this year. Those projections show that on average they expect two increases to 0.75 percent. The Fed has held short-tem rates near zero since December 2008. "I think some of the headwinds that have been holding the economy back are beginning ro recede," Ms. Yellen said at her news conference. Ms. Yellen said officials were inclined to raise rates because they expected continued improvement in the labor market and a rebound in inflation that would move it closer to its desirable level.

In place of its recent promise to remain ďpatientĒ in deciding when to start raising rates, the committee's statement said that the Fed would act "when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term."

The statement said that the Fed "remains unlikely" to act at its next meeting, in April, turning its intention to subsequent meetings. A number of analysts said that they view the Fed's September meeting as the most likely date. The most striking change on Wednesday were in the Fedís quarterly economic forecast. Officials said they now expected economic output to expand 2.3 to 2.7 percent. A downgrade from their December estimate of 2.6 to 3 percent. Forecasts for 2016 and 2017 were also revised downward, the latest instance in the Fedís post crisis pattern of repeated reducing its forecast. Officials also shaved their estimates of inflation. In 2015, they now project, prices will rise 0.6 to 0.8 percent, and then 1.7 to 1.9 percent in 2016.

Most consequently, officials reduced their estimates of the lowest level of unemployment that is consistent with stable inflation. The average forecast of 5 to 5.2 percent was significantly lower than the December average of 5.2 to 5.5 percent and almost as low as the pre-crisis average. The changes reflect the reality that the unemployment rate has already reached the top of the old range without any evidence of faster wage growth.

In keeping with these forecasts, Fed officials also pushed back their expectations about the timing and the pace of interest rate increases, after rates reach 0.75 percent by the end of this year, officials expect them to hit just 2 percent by the end of 2016.

Now may be a good time to refinance. More to come next month. Read previous Real Estate & Housing Market News.


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