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First, he told us “higher for longer.” Now he’s simply telling us to stay in place.
Federal Reserve Chairman Jerome Powell elected to pause the benchmark short-term interest rate again on Wednesday, leaving the Federal Funds Rate at 5.25 percent and 5.5 percent for the fourth consecutive month since raising it by 25 basis points in July.
This is the third time in four meetings that Powell and the central bank’s board have elected to pause interest rates since beginning a sweeping series of rate hikes in March 2022.
“Today, we decided to leave our policy interest rate unchanged and to continue to reduce our securities holdings,” said Powell. “Given how far we’ve come, along with the uncertainties and risks we face, the committee is proceeding carefully.”
A statement from the Federal Reserve noted that “economic activity expanded at a strong pace in the third quarter,” and that hirings have “moderated since earlier in the year but remain strong.” Unemployment currently stands at 3.8 percent, while the Fed has decreased its securities holdings by $1 trillion in the last year.
Powell seemingly opened the door for future rate increases.
“We will make decisions about the extent of additional policy firming, and how long policy will remain restrictive, based on the totality of the incoming data, the evolving outlook, and the balance of risks,” he said.
Going into Wednesday, the Fed had raised the Federal Funds Rate 11 times since March 2022, when the benchmark rate sat between 0.25 percent and 0.5 percent, a level the Fed had targeted at that time to free up capital during the COVID-19 pandemic that began in 2020.
But strangled supply chains and trillions of dollars in stimulus helped ignite the worst inflation the nation has seen since the early 1980s, leading Powell and the Federal Reserve to initiate the swiftest rate increase in 40 years and bring the Federal Funds Rate to its highest level in 22 years.
Core inflation has dropped from a high of 9.1 percent in June 2022 to a more reasonable line of 3.7 percent this quarter, but still above the Fed’s targeted 2 percent core inflation rate.
Greg Friedman, managing principal and CEO at Peachtree Group, a real estate investment firm, praised Powell’s decision to hold the rate pause, emphasizing the need for commercial real estate capital markets to receive some predictability from the Fed on where interest rates will settle in the near term.
“Ultimately, we need predictability for a lot of this volatility to wane,” said Friedman. “Once we have predictably, the market will reset valuations. It’s very hard to value commercial real estate because [CRE] values are directly or indirectly correlated to the cost of capital and the cost of debt.”
Another benchmark interest rate has further impacted CRE activity as much as Powell’s short-term Federal Funds Rate.
Numerous CRE transactions — from commercial mortgage-backed securities (CMBS) to commercial mortgage rates to bank loan terms — are based on the benchmark 10-year Treasury yield. For much of the past decade, yields on the 10-year Treasury have been low, particularly from 2020 through 2022, when yields largely remained under 1 percent.
But with the 10-year Treasury yield reaching 5 percent for the first time in 16 years, much of the tough love Powell has tried to communicate to the market over the last 18 months has finally hit home, mainly through the pullback by bond investors.
“All they really did in September was come out and say, ‘We’re going to be higher for longer,’ and between that and other cues, the market finally got the message that the Fed was serious, that it wasn’t lip service, and then the long-term bond rate blew out 50 basis points,” explained Ryan Severino, chief economist at BGO, formerly BentallGreenOak. “That made financial conditions tighter than they were and, to an extent, kind of did the Fed’s job for them.”
“It’s the long end of the curve that impacts the asset class of commercial real estate, and the Fed not raising in the short end, but raising in the long end, impacted how the market was behaving,” he added.
Nick Villa, an economist at Moody’s Analytics, said that his firm expects the Fed to hold rates constant through the end of the year and that it’s not until the second half of 2024 that Moody’s has priced in actual rate cuts, which it predicts will bring the Federal Funds Rate down to mid- to high 4 percent by November 2024.
“No, we don’t think they will increase interest rates further,” said Villa. “As yields have increased, it’s effectively diminished the need for future interest rate hikes. It’s tightened credit conditions, and they have also made good progress in terms of bringing down inflation.”
Others, however, are not so sure. With consumer spending continuing at an unabated pace and third-quarter GDP growth hitting 5 percent, the economy is not responding as traditional economists have predicted it would amid the higher rate climate — economic activity and spending is supposed to contract in a higher interest rate environment.
“I still believe we’re in for an uptick in the future. Inflation has not stopped, and the pricing of everything is getting very expensive,” said Rob Gilman, head of real estate services at accounting firm Anchin. “Spending just continues, so what alternative do they have but to keep raising interest rates — will another 1- or 2-point increase change this? I don’t know, but it’s very surprising.”
Powell, when taking questions, seemed to indicate he agreed that the long pause doesn’t rule out a future rate hike.
“The idea that it would be difficult to raise again after stopping for a meeting or two is just not right. The committee will always do what it thinks is appropriate at the time,” he said. “We didn’t talk at all about making a decision in December today. It was for this meeting and understanding broader things.”
Brian Pascus can be reached at bpascus@commercialobserver.com
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