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Why the Federal Reserve didn’t increase the interest rate
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Why the Federal Reserve didn’t increase the interest rate

Friday, 18 September 2015 – America’s Federal Reserve has decided against raising the interest rate. This is the conclusion of many hours of debate between Board members, after which they announced it would stay at 0.25%, a level set back in December 2008 during the Bernanke era. Out of ten people present at the meeting, only one voted for an increase. Federal Reserve Chair, Janet Yellen, named low inflation (1.6%) and instability on the world’s financial markets among the reasons for this decision.

Housing market still “depressed”

In last night’s statement, the FRS mentioned among other things an improvement in the property sector. Nevertheless, Mrs. Yellen noted that residential real estate in the US had not fully recovered from the 2007–08 crisis and remained “very depressed”. There are too few new construction projects and it contradicts positive growth signals like employment and income.

The chairwoman went on to say that real estate would not be a key driver for further economic growth, but played “a supporting role.” She underlined that it would respond to further growth in the economy.

“The housing market is sensitive to mortgage rates. It is an important factor but that's something that of course we're taking into account in thinking about what’s the appropriate path of policy,” she said.

Meanwhile, one day ahead of this meeting, the US Mortgage Bankers Association reported a 7% decrease in mortgage applications from the week before while the Refinance Index showed a drop of 9% over the same period. Maintaining a low interest rate is an economic stimulus designed to increase spending by facilitating access to credit. Indeed, a higher base rate would push mortgage interest rates up.

No bubble on the commercial property market

“Yesterday’s decision by the Federal Reserve means that property prices will continue to grow. Moreover, the current trends on the US market are likely to emerge in Europe,” - comments George Kachmazov, managing partner of Tranio.

Residential property prices are struggling to maintain growth and only gained 0.20% nationwide in August meaning the market is still fragile. In contrast, the commercial real estate market is booming. According to JLL, the transaction volume grew by 36% in H1 2015 (against H1 2014) reaching $232 billion. At this rate, this sector might reach its pre-crisis peak within two years. However, strong growth has market experts warning of a potential bubble, but the Fed’s decision shows confidence that it is still far from formed. Indeed, had they raised the interest rates, it could have signaled the bubble was too close for comfort.

Outlook

  • Expect the interest rate to rise over the next two years as the Fed predicts 2% GDP growth and unemployment to fall to 4.8% by 2018, along with inflation reaching 2% by 2017.
  • At 5.1%, unemployment in the US is at its lowest since April 2008. If incomes and employment will continue to grow, demand for real estate market should also increase.

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