Copyright: Structuresxx
U.S. real GDP growth in the second quarter was revised down to an annualized rate of 2.1 percent from 2.4 percent, according to yesterday's release from the U.S. Bureau of Economic Analysis, still marking the fourth consecutive quarter of positive economic growth. This sustained growth of economic output highlights the resilience of the U.S. economy amidst the Federal Reserve’s aggressive series of interest rate hikes over the past year and half – the effective federal funds rate rose from 0.08 percent in February 2022 to 5.12 percent in July 2023 – and increases the odds of a soft landing as inflation continues to moderate.
When we exclude the cost of shelter, consumer prices rose just 1.0 percent year over year in July, well below the Fed’s 2.0 percent target. It’s only a matter of time before shelter inflation comes down as well, since we know CPI data lags actual market data, bringing down headline inflation with it.
As inflation gets closer to the Fed’s 2 percent target, the Federal Reserve should feel less pressure to continue raising its target federal funds rate. This would be a welcome development for the apartment industry, where rising rates have caused both debt and equity capital to pull back from the apartment market, leading to a sharp pull back in both the sales and construction of apartments.
However, risks in the economy persist, and a soft landing is hardly guaranteed. Monetary policy operates with long and variable lags, so, even if the Fed were to halt its series of rate hikes today, it could be many months before we feel the full consequences of interest rate increases that have already occurred. Additional interest rate hikes will further exacerbate this risk.
