Even after Wednesday's Fed hike, experts say interest rates remain far too low

The threat of another big hike in interest rates by the U.S. central bank had markets in a tizzy this week, but some critics worry that the bigger-than-expected increase won't be enough to stop inflation.

Even as the market digested Wednesday's extraordinary three-quarters of a per cent rate increase in the Fed rate, Federal Reserve chair Jerome Powell made it clear that interest rates are likely to go higher yet. 

"Right now, our policy rate is well below neutral," he said, referring to the theoretical balancing point where interest rates neither stimulate nor slow the economy.

"The federal funds rate, even after this increase, is at 1.6 per cent," Powell told reporters at Wednesday's monetary policy news conference, and he said that by the end of summer that could rise to between two and three per cent.  "That's still a low rate."

Toronto real estate broker Frank Leo agrees. 

Despite Wednesday's Canadian real estate data showing a 13 per cent decline in average sale prices since February, Leo, who runs a successful team of agents under the ReMax brand, said the market has by no means dried up. And one of the reasons properties keep selling, he said, is that borrowing at current rates remains a good deal.

While it was the U.S. Fed that hiked rates on Wednesday, the federal funds rate directly affects the price of money in Canada too.

Leo said that if the interest rate remains below the neutral rate, real estate is still a seller's market. And even after interest rates climb to neutral, he says, the market will continue to function well.

"That neutral rate or normal rate of interest is one that will allow the economy to grow at a good pace and still not, you know, slow it down," he said.

As someone who makes his living in the real estate business, Leo may have a tendency toward optimism — but regional data shows that, even with rising interest rates, houses in the Toronto area are still in short supply. 

Leo said there is currently about two months of inventory.

"When we get to five and six months, that's when it's balanced," he said. 

In many ways, Leo's definition of the neutral rate is very close to the one offered by central banks. 

According to the San Francisco branch of the Fed the neutral rate "is the federal funds rate that neither stimulates (speeds up) … nor restrains (slows down, like hitting the brakes) economic growth."