The Real Deal Los Angeles

Fed more likely to raise rates in September: report

Strong jobs report indicates economy is improving

July 19, 2016 09:30AM

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Daniel Tarullo and Janet Yellen

Daniel Tarullo and Janet Yellen

From the New York website: The Federal Reserve is warming up to the idea of raising interest rates in September.

The Fed raised its benchmark federal funds rate in December, but delayed further increases amid weaker-than-expected job reports and uncertainty over Britain’s vote to leave the European Union.  It is still unlikely to raise rates in July, but is increasingly likely to do so in its Sept. 20 meeting, the Wall Street Journal reported.

The U.S. economy added 287,000 jobs in June – a higher figure than previously expected, indicating that the economy is gaining strength. And financial markets have recovered from their post-Brexit shock, removing another reason to keep rates low. As a general rule, the Fed seeks to keep interest rates low when the economy is weak to stimulate investment, and raise them when it is strong to prevent runaway inflation.

The Atlanta Federal Reserve Bank’s president Dennis Lockhart last week said that the Brexit vote “does not seem to have caused direct harm to the country’s economy.”

For the real estate industry, the prospect of a rate hike is a mixed bag. On the one hand, it indicates a healthy economy, which means more demand for office space, retail and housing. On the other hand, higher benchmark rates tend to trickle down to higher mortgage rates and bond yields, which raise the cost of financing and put downward pressure on commercial property prices.

But not everyone on the Fed’s board of governors supports a September rate hike. Federal Reserve Governor Daniel Tarullo recently told the Journal he would rather wait for inflation to pick up before raising rates.

“This is not an economy that is hot,” he said. “This is not the late ’70s.” [WSJ] – Konrad Putzier