What To Take Away From The Latest Fed Meeting
Commentary from the latest Fed meeting indicates that rates will continue to rise, although the pace of increase could slow -- and the risk of a recession in 2023 is heating up.
The big takeaways from the Federal Reserve’s commentary around its latest rate hike for CRE investors? Interest rates will continue to tick up, although the pace of increase could slow — and the risk of a recession in 2023 is rising.
“The Fed won’t blink if it comes,” said Marcus & Millichap’s John Chang. “We may be facing a bumpy road in 2023 but if the Fed’s plan works, inflation will come back down and the economy will enter a new growth cycle.”
Chang says the Fed has “basically suggested they’re done front-loading rates.”
“The heavy lifting is over and going forward 75 basis point movements are less likely,” he said, adding that while a 50 basis point increase is still expected in December, Chairman Powell did not take 75 basis points off the table completely.
Chang also noted that incoming data suggests the ultimate level of interest rates will be higher than previously expected. The Fed also acknowledged in its latest meeting the time lag between their rate movements and the resulting effect on the economy.
“Taken together, these statements have bee interpreted to mean that going forward the rate increases will get smaller but they will continue for longer and ultimately raise rates higher than the Fed originally thought,” Chang says. “For CRE investors, that’s a mixed blessing.”
On one hand, it suggests that debt capital will become increasingly expensive as rates rise. But if the Fed take smaller, slower steps, some of the disconnect between sellers and buyers in the CRE market could ease.
“The market is having a hard time keeping up,” Chang says. “In the 90 days from when a property goes under contract to when it closes the interest rate could move 100 to 150 basis points. That can radically affect the underwriting.”
Commentary about the labor market also caught Chang’s attention, he said, as did Powell’s statement that the window for a soft landing has narrowed, but is still possible.
“Other comments made at the press conference suggest the Fed won’t let up until they see a clear downward movement in the inflation rate that indicates it will retreat to the 2% range,” Chang said.