Inflation is Down Today: What Will the Fed Do Next Week?

Inflation is Down Today: What Will the Fed Do Next Week?

By Jorge Vazquez, CEO of Graystone Investment Group

Inflation has been a dominant economic issue for the past few years, influencing everything from consumer spending to investment strategies. Today, we find ourselves at an important juncture: inflation has dropped to 2.5%, its lowest level since February 2021. Energy prices are falling, and while housing prices are still rising at a modest rate of 0.05% per month, overall inflationary pressures are easing. These developments are encouraging, but they also lead to a pressing question: What will the Federal Reserve do at their upcoming meeting next week?

In this article, I’ll analyze the factors influencing the Fed’s decision-making process and explore how their next move could impact real estate investors, particularly in high-growth markets like Tampa, Florida. From potential interest rate cuts to the broader economic landscape, we’ll dive into the details to prepare for what’s next.

The Current Economic Landscape: Inflation at 2.5%

As of today, the annual inflation rate stands at 2.5%, a significant drop from the elevated levels of the past two years. For context, the inflation rate peaked above 9% in mid-2022, driven by supply chain disruptions, rising energy costs, and an overall surge in demand as the economy recovered from the pandemic. Now, with inflation cooling, the economic outlook is shifting.

This 2.5% inflation rate marks a turning point, but it doesn’t tell the whole story. Despite the reduction, prices are still 21.2% higher than they were in February 2020, before the pandemic-induced recession began. This means that while inflation is no longer rising as quickly, consumers and businesses are still dealing with the consequences of several years of price increases. For real estate investors, this poses both challenges and opportunities.

Energy Prices Are Down, Easing Pressure on Investors

One of the most significant factors contributing to the lower inflation rate is the decline in energy prices. Energy costs had been a major driver of inflation, impacting everything from transportation to heating and cooling expenses for properties. Now that energy prices are falling, real estate investors can breathe a little easier when it comes to operational costs.

Lower energy prices are particularly beneficial for those managing rental properties, multifamily units, or commercial buildings, where utilities represent a sizable portion of monthly expenses. Additionally, for investors undertaking renovations or new construction projects, lower energy costs can reduce overall project costs, freeing up capital for further investments.

However, while lower energy prices provide some relief, they aren’t enough to offset the overall increase in housing prices and other expenses, which brings us to the housing market.

Housing Prices: Still Rising, But at a Slower Pace

Despite the cooling of overall inflation, housing prices are still on the rise. The current rate of increase is 0.05% per month, which may seem modest, but it adds up over time. For real estate investors, this presents both a challenge and an opportunity. While housing costs continue to climb, so do the potential returns on investment, particularly in markets like Tampa, where demand remains strong.

The key for investors is to remain proactive. Rising housing prices mean that the cost of acquiring properties will continue to increase, even if at a slower rate. This makes it all the more important to act quickly, especially if the Federal Reserve decides to lower interest rates, which could provide a window of opportunity to secure favorable financing terms.

The Federal Reserve’s Role: What Will They Do Next Week?

With inflation down and energy prices decreasing, all eyes are on the Federal Reserve as they prepare to meet next week. The Fed’s actions over the past two years have been focused on curbing inflation by raising interest rates, which in turn made borrowing more expensive. Mortgage rates, for example, rose sharply, which had a direct impact on the housing market by making it more costly for buyers and investors to finance property purchases.

Now, with inflation down to 2.5%, there is growing speculation that the Fed will shift its approach. But by how much?

Many investors were hoping for a significant rate cut of 0.5%, which would have provided a strong signal that the era of high borrowing costs was coming to an end. However, recent stock market movements suggest that expectations are being tempered. The stock market is down, reflecting a belief that the Fed will only lower rates by 0.25% rather than the hoped-for 0.5%.

Why the Fed Might Choose a 0.25% Rate Cut

Several factors could influence the Fed’s decision to opt for a more modest 0.25% rate cut instead of a larger 0.5% reduction. First, while inflation has cooled, it is still above the Fed’s long-term target of 2%. This means that the Fed may want to continue taking a cautious approach to avoid a resurgence of inflationary pressures.

Second, housing prices, though rising slowly, are still on an upward trajectory. A larger rate cut could stimulate even more demand in the housing market, driving prices higher and potentially leading to affordability issues for first-time homebuyers and investors alike.

Lastly, the broader economy, while showing signs of stabilization, is not yet out of the woods. A 0.25% rate cut would signal that the Fed is willing to ease monetary policy, but it would also allow them to maintain flexibility in case inflation or other economic risks re-emerge.

The Impact of a 0.25% Rate Cut on Real Estate

For real estate investors, a 0.25% rate cut would still be a positive development, though it might not have the dramatic impact that some had hoped for. Here’s what we can expect:

1. Lower Borrowing Costs: A 0.25% reduction in interest rates will make mortgages and loans slightly cheaper. This could improve cash flow for investors who are looking to refinance existing properties or take on new loans for property acquisitions.

2. Increased Competition: Lower interest rates tend to attract more buyers into the market, which could increase competition for properties. In markets like Tampa, where demand is already strong, this could push housing prices up even further, despite the overall easing of inflation.

3. Opportunities for Refinancing: Investors using strategies like BRRRR (Buy, Rehab, Rent, Refinance, Repeat) will benefit from even a modest reduction in rates. Lower refinancing costs can improve profitability and help investors free up capital to acquire more properties.

4. Continued Price Growth: While interest rates may come down, the fact that housing prices are still rising at 0.05% per month means that investors need to be mindful of long-term trends. Acquiring properties now, before prices rise further, could prove advantageous.

Preparing for the Fed’s Decision

As real estate investors, it’s critical to be prepared for whatever decision the Fed makes next week. Whether they lower rates by 0.25%, 0.5%, or not at all, the key is to have a plan in place that allows you to take advantage of market conditions.

Here are some strategies to consider:

1. Act Quickly on Acquisitions: If you’ve been on the fence about acquiring new properties, now may be the time to act. With interest rates likely to come down, even a small reduction can make a significant difference in your borrowing costs. In markets like Tampa, where demand is strong and prices are still rising, securing properties before further price increases could be a smart move.

2. Focus on Value-Add Opportunities: As prices continue to rise, look for properties that offer value-add potential. These are properties that may need some work but can offer strong returns once renovated or improved. With lower interest rates, financing these improvements becomes more affordable, and the long-term appreciation potential makes them attractive investments.

3. Monitor Market Conditions: The real estate market is constantly evolving, and staying informed is key to making sound investment decisions. Keep an eye on housing price trends, interest rate movements, and economic indicators to ensure you’re positioning yourself for success.

4. Prepare for Increased Demand: If the Fed does lower rates, be prepared for increased competition in the housing market. This could mean faster turnaround times for deals and potentially higher prices. Having financing pre-arranged and being ready to move quickly will give you an edge over other buyers.

Final Thoughts

Inflation may be down, but the road ahead remains uncertain. The Federal Reserve’s decision next week will have a profound impact on the real estate market, and as investors, we need to be ready to adapt to whatever comes next. Whether the Fed opts for a 0.25% rate cut or something more aggressive, there are opportunities on the horizon for those who are prepared.

At Graystone Investment Group, we’ve navigated through various market conditions, and our experience has shown that even in times of uncertainty, there are always opportunities for those who are willing to act decisively. Lower interest rates, rising housing prices, and falling energy costs create a unique environment for real estate investors, particularly in markets like Tampa.

Stay informed, stay prepared, and seize the opportunities that come your way. Whether you’re a seasoned investor or just getting started, the key to success in real estate is to remain adaptable and proactive in the face of change.

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Vanessa has over 23 years of business management experience and has been in the real estate industry since 2018. She and her team prioritize serving clients and finding the right financing options. Schedule a meeting with Vanessa: https://graystoneig.com/vanessa