The Fed Puts the Hammer Down About the Future

Yesterday’s announcement of a 50-basis point benchmark interest rate increase by the Federal Reserve’s Federal Open Market Committee was expected to have a conciliatory, kinder, and gentler tone.

But, for the CRE industry, if the announcement were a movie, it was less romcom and more opening undertones of dread in a horror film.

Yes, there was an increase of “only” 50 basis points. Historically a fast clip, but far better than the previous four 75-basis point ones so far this year. Not counting the other couple of hikes at the beginning of 2022.

But it was rest of the story that was the problem.

“The Committee anticipates that ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time,” the Fed said in its release. “In determining the pace of future increases in the target range, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in the Plans for Reducing the Size of the Federal Reserve’s Balance Sheet that were issued in May.”

In other words, expect rates to keep going up, at a pace dependent on what future data shows, and so-called quantitative tightening, as the Fed slims its balance sheet of mortgage-backed securities to further reduce market liquidity.

The reminder of continued escalating rates seemed to surprise various markets. Early in November, there were hints that the Fed might slow the pace of future rate hikes. By Chair Jerome Powell’s speech at the Brookings Institution, that seemed certain.

But there have been those warnings by other Fed officials about how interest rates likely had a way to go to fully slow inflation back to the 2% level the organization seeks.

And so, even if the sizes of the jumps decrease, the number will continue well into next year and perhaps all the way through. The “dot plot” of expectations of FOMC members and presidents of each Fed bank show that they don’t see a rate decrease until 2024, when benchmark rates might top 5% and the deals get even hard to pencil than today.