Fed Hikes Rates 75 Bps

Today, the Federal Reserve announced a major, 75-basis-point increase in the federal funds rate. This marks the largest single shift in interest rates in nearly 30 years, on par with the November 1994 increase of the same.

The increase brings the federal funds rate's target range to 1.0% and 1.75%.

This move comes less than a week after the Bureau of Labor Statistics reported in its Consumer Price Index Summary that prices have skyrocketed 8.6% year-over-year through May, compared to the 8.3% reported the month before. The Fed noted that its decision was indeed based on persistent inflation, which has not slowed even after two smaller increases this year — the first, a 50-basis-point increase last month, and a 25-basis-point increase in March.

Inflation's Blow-Up

The largest area of inflation indicated by the CPI report was, unsurprisingly, energy. But with the Russia's ongoing invasion of Ukraine leading to massive oil cost increases, this category of goods is unlikely to be significantly impacted, owing to relatively inelastic demand. The same may go for food, where prices increased by more than 10% during the same period.

However, increased rates may help stifle major price increases in other goods and services, from new and used cars to homes, as personal lending becomes far more expensive.

What Else Can Be Done?

Many Wall Street analysts anticipate another, similar increase after the Fed's next meeting, scheduled for July 26 and 27. CBS News reported that the Fed's terminal rate could be as high as 4%, based on reports from external analysts.

The White House has announced it is considering suspending tariffs on imported cheap goods from China. The repeal of those taxes, imposed by the previous administration, would not be sufficient in and of itself, The New York Times reported.

Apart from the Fed's actions, there are few effective tools to combat further inflation. And despite worries over rising interest plunging the economy into a recession, the Fed may feel this as a preferable outcome to potentially double-digit inflation.

Immediate, Longer-Term Multifamily Impacts

The latest round of increases will likely have a chilling impact on multifamily and other commercial real estate investment, particularly for small, private investors. While major investment firms with significant dry powder may find themselves impacted to a lesser extent, smaller borrowers will need to scale back loan requirements due to the higher cost of capital.

In the longer run, interest rate rises — both the ones enacted so far this year, and those likely to follow — will place some upward pressure on multifamily cap rates, which have been sliding for the past year or more — especially in major gateway markets. That said, cap rates have thus far held relatively steady since the start of the year, though trends may take time to realize.