This CRE Analyst Says the Fed is Oversteering

The Fed “has pushed us into an inflection point,” according to one industry watcher, and “may be oversteering” as additional rate hikes loom before year’s end.

“I think the Fed may be oversteering,” Marcus & Millichap’s John Chang says in a new analysis. “Think back a year ago…inflation was already rising rapidly but the Fed held to its position that inflation was transitory. They kept their foot on the accelerator with quantitative easing until they started to back off in November…even then, they phased it out over a four-month span. The Fed was holding interest rates down until March of this year. Now they’re swerving in the other direction.”

Chang notes that Fed Chairman Powell has made the possibility of economic pain quite clear in his messaging since last August. And American business is taking note: in a recent survey of CEOs by KPMG, 91% said the US will face a recession in the next 12 months (though they also remain positive about their three-year outlook). Chang notes that the overall CEO confidence level has been showing “a pretty healthy decline” as well, though it remains higher than when the world entered the COVID-19 pandemic or the Great Financial Crisis. Small business confidence and consumer confidence are also showing weakness.

“None of them are screaming recession, but they do merit monitoring,” Chang says. What’s more, the ISM Manufacturing Index also fell to 50.9 last week and is at its lowest level since May 2020. Job openings data also showed a million fewer unfilled jobs: in July, there were 11.1 million job openings and in August there were 10.1 million unfilled positions. All told, there are still about 4 million more openings in the US than people looking for work.

“We are not in a free fall or even a contraction, but it does appear that the employment market, like the manufacturing index, while still positive but not as strong as it was a month or two ago.,” Chang says. “A lot of this will be driven by the Federal Reserve. Arguably, the Fed has been oversteering. That implies the Fed will go through with their telegraphed 75 basis point increase in November unless there are substantive changes in the economic readings.”

And for CRE, this means likely continued upward pressure on interest rates as well as slowed hiring, rising unemployment, and spending and inventory reduction.

“If those things happen, it would weigh on demand for most types of commercial real estate,” Chang says. “I’m not sounding the alarm, but a modest recession is becoming increasingly probable, and uncertainty is rising.”