The Federal Reserve is staying the course--for now--on its federal funds interest rates of 0 to 0.25 percent and its monthly $120 billion purchases of Treasury Bonds and mortgage-backed securities. Chairman Jerome Powell made it clear that the Fed’s position is that the U.S. economy, while improving, has still not made enough substantial progress toward the goals of stable prices and low unemployment. Powell also noted that while inflation is above the Fed’s two-percent objective, the persistent trend, projected to continue in the near term, is ultimately expected to slow.

This is encouraging news for real estate investors, as historic-low interest rates and eager lenders continue to drive acquisitions and recapitalizations. The current annual inflation rate for the 12 months ending in June 2021 is 5.39 percent, well above the Fed’s target, but this is anticipated to continue to benefit real estate investment activity.

“For investors, real estate is a hedge against inflation,” said Matthew Dzbanek, Director, Capital Services, Ariel Property Advisors. “Particularly with home prices rising and commercial valuations back on the rise, real assets will continue to be attractive for investors for the foreseeable future. Meanwhile, if interest rates stay low, investors will want to lock in loans now for the next five to seven years, which will support continued market activity.”

Powell continued to assert that high inflation right now is largely due to transitory factors. In the real estate sector, for example, the median price of a new home is $361,800, 6.1% more expensive than it was a year ago. However, much of the rising costs of homes were due to a massive spike in acquisitions during the height of the pandemic. At the same time, sales of single-family homes fell to a 14-month low.

“These SFH numbers aren’t necessarily indicative of an unhealthy market,” said Dzbanek. “The story they tell is that the market outside of urban cores is somewhat settled after the wave of acquisitions and moves during the pandemic. Particularly with the renewed interest in rentals and purchases in places like Manhattan, the residential market is continuing to show growth.”

Rising construction and renovation costs are similarly transitory, relating directly to supply chain issues and labor shortages, both of which are anticipated to subside as the economic recovery progresses. Progress is exactly what the Fed is monitoring as it continues to decide on when to raise interest rates and taper its securities-buying.

“What would substantial further progress be?” said Powell. “I’d say we have some ground to cover on the labor market side. I think we’re some way away from having had substantial further progress toward the maximum employment goal. I would want to see some strong job numbers.”

There have certainly been indicators of progress here as well. According to the Bureau of Labor Statistics, employers added 850,000 jobs in June. Even more positive was the fact that prime workers (aged between 25 and 54) saw a rise in labor force participation to 81.7 percent, up from 81.3 percent in April and May—the highest it has been since the beginning of the pandemic. With many workers expected to return to the office after Labor Day, the jobs outlook is continuing to look brighter, which will also pick up the retail and hospitality markets.

Still, there are uncertainties to consider, such as the Delta Variant, which may upset the rise in in-person activities, including the return to work. Powell, however, suggested that businesses have already adapted changes in their operations, which would mitigate the effects of another spike. Additionally, the prevalence of vaccination is also anticipated to create a more resilient economy.

Notably, one course of action that the Fed did take to drive economic activity and create long-term resilience was the establishment of two repurchasing agreement facilities to add stability to money markets. One will be a standing program for U.S. market participants; the other will target foreign participants and other central banks. Repurchasing facilities (or repo facilities) allow financial institutions to gain short-term cash loans in exchange for parking assets with the Fed. These loans come at a rate of 0.25 percent with a cap of $500 billion.

“What the Fed’s most recent statement tells us overall is that they are confident, despite some uncertainties about inflation and the Delta variant, that liquidity and investor incentives will continue to create the foundation for long-term stability and growth,” said Dzbanek.