In the News – Fed to Raise Rates at March Meeting

In the News – Fed to Raise Rates at March Meeting

After a strong labor market report for February, the Federal Reserve will raise the federal funds rate in March — the first of what will likely be as many as four rate hikes this year. The Fed must be careful not to move too fast, as inflation remains low and price increases can be slowed by additional supply, particularly in housing.

According to the labor report, total payroll employment increased by 313,000, while the unemployment rate was unchanged at 4.1% due to a gain in the labor force participation rate (now at 63%). Wage growth was estimated at 2.6% compared to last year, which raised market concerns about inflation. However, wage gains driven by increased productivity and business investment are not inflationary. They are fundamentally positive for the economy and housing.

The growing labor force is also key to sustainably growing the economy. In February, home builders and remodelers added 25,400 jobs. Total residential construction employment now stands at 2.8 million, with the unemployment rate at just 5.7%. Builders continue to report labor shortages, and NAHB predicts the constraining pace of hiring will linger.

Higher interest rates will increase the cost of borrowing for home-buyer and builder/developer financing. However, with after-tax incomes rising in 2018, the effects on affordability will be offsetting. For example, housing affordability was flat throughout 2017. And on the supply side, developers reported easing conditions for AD&C loans, the market for which expanded 7% by the end of 2017 compared to the year prior.

–NAHB Chief Economist Robert Dietz

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