New York Federal Reserve President John Williams was forced to defend the recent increase in US base rates. Amid concerns that the US economy is not as strong as many first thought, the Fed has been extremely open regarding the reasons surrounding the recent rise. There seem to be two very different views regarding the short to medium term performance of the US economy. How will this impact property markets and who is right?
The Fed
The Fed believes that US economic growth will hit 3% this year although it is expected to slow in 2019. Suggesting that the recent rise was “fully justified” it would appear that the Fed is looking to increase the cost of finance and avoid a boom and bust scenario in the short to medium term. Acting on a “data dependency” policy the Fed believes that the US economy has a strong backbone and will not fall back too far. However, this is not a view held by the money markets and stock markets hence the recent fall in share prices.
Stock market investors
Over the last few weeks stock-market investors have clearly shown their disapproval of the recent rate rise and suggestions there could be at least two more in 2019. There are serious concerns that worldwide economic issues could have a significant impact on the US economy in the short to medium term. Many experts believe that the Fed is blinkered to international issues, ignoring the wider context of trade tariffs and issues such as Brexit. Even though Brexit will not necessarily have a direct impact on the US economy it will cause concern and confusion in Europe and ripples throughout the worldwide economy.
Could the Fed change tack on US interest rates?
Donald Trump is firmly in the camp of stock-market investors, expressing deep concern about the recent interest rate rise. Interestingly, the Fed has acknowledged the need to listen to investors and businesses in relation to the US economy. Indeed, there was a suggestion that if the economy was weaker than expected in 2019 then the policy of interest rate rises could be dumped.
We have a number of issues to consider here, firstly Donald Trump is at serious loggerheads with the Fed and the Fed has confirmed the current policy of interest rate rises may change. If there is one thing that investors, stock markets and money markets dislike, it is confusion. If we had a firm best-case scenario and a worst-case scenario then markets could react but there is no real guidance at the moment.
Property markets
A recent Reuters’ poll perfectly illustrates the concerns amongst property investors. Just three months ago US house price rises across the 20 metropolitan areas were expected to hit 4.7% in 2019 and 3.5% in 2020. The most recent poll has seen a slashing of growth forecasts to just 3.7% in 2019 and 2.8% in 2020. Amid concerns that house prices have peaked in the short term, the cost of finance will only rise and uncertainty about the state of the US economy, there could be further downgrades in due course.
Many experts have also highlighted the apparent disconnect between the US economy and the US property market. In recent times the US property market has been the engine of the economy but recently this has faded. This prompted the question, if the US property market is not the main motivation for recent economic growth, what is? More importantly, will it hold?