Fed Scores Another 75 Basis Point Interest Rate Hike

As many expected, the Federal Open Market Committee of the Federal Reserve in its scheduled meeting today announced another 75-basis point increase to its benchmark target rate range. That’s the third time this year the Fed has done so, making the overnight rate range at which banks lend to one another now 3% to 3.25%.

Not only does that mean higher interest rates everywhere else, and certainly in CRE financing, but the FOMC “anticipates that ongoing increases in the target range will be appropriate.” In other words, expect the process to continue and rates to keep increasing.

As the New York Times put it: “Even more notably, policymakers predicted on Wednesday that they will raise borrowing costs to 4.4 percent by the end of the year — suggesting that they could make another supersize rate move, followed by a half-point adjustment. Officials estimated that rates will climb to 4.6 percent by the end of 2023, up from an estimate of 3.8 percent in June, when they last published estimates.”

Also, as the Fed noted, “the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities.”

“The Committee is strongly committed to returning inflation to its 2 percent objective,” it said.

The rationale for this size of increase has everything to do with “recent indicators [that] point to modest growth in spending and production.” The indicators include ongoing strong job growth, a continuing low unemployment rate, and inflation that is high compared to the Fed’s 2% target.

The inflation issue, which is what ultimately set off the interest rate increases, suggests ongoing supply and demand “imbalances,” elevated food and energy prices, and broader price pressure. Also, the war between Russia and Ukraine also puts more pressure on inflation—it and sanctions on Russia put constraints on oil and gas flowing out of the former and disruption of grain supplies from the latter.

The inflation news earlier in September basically locked in by the increase among basic consumer expenditure types. Food was up 0.8% month over month. That’s the lowest growth since February, but still significant at an 11.4 percent unadjusted 12-month increase. Shelter, meaning rent and, for homeowners rent equivalents, were up 0.7% month-over-month and 6.2% on a 12-month basis. Transportation was up 0.5% from July to August and is still up 11.3% over 12 months.

Could things change with less upward pressure on interest rates? Certainly. “The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals,” the Fed said. “The Committee’s assessments will take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments.”

So, a near-term improvement of conditions could affect decisions. Then again, worsening signs could mean even more pressure.

For some perspective, the last time the Fed rate was at the now-current level was back in early 2008. An average of the Federal funds rate from the beginning of 1970 through the end of 2007, missing the odd years since the Great Recession, is 6.6%, according to a GlobeSt.com analysis of data from the Federal Reserve. If the country is headed back to more historical norms, it could be a long way yet to go before there’s rate stabilization and predictability.