Fed Minutes: Don’t Hold Your Breath for Lower Interest Rates

As much as many in CRE, to say nothing of investors in other asset types, would like to think the Federal Reserve will stop the rate increases, the released minutes from the latest Federal Open Market Committee meeting are clear that this is unlikely to happen. More importantly, they show why.

“With inflation still well above the Committee’s longer-run goal of 2 percent, participants agreed that inflation was unacceptably high,” the minutes said. Even while “inflation data received over the past three months showed a welcome reduction in the monthly pace of price increases … substantially more evidence of progress across a broader range of prices would be required to be confident that inflation was on a sustained downward path.”

Housing services inflation would likely begin falling later this year, they thought. That is important as shelter prices have been a significant driver of inflation and must come down if rates are eventually to lower. That will mean pressure on multifamily, though, because lowering prices means less support for higher property values and, as a result, higher cap rates.

Participants in the meeting also agreed less slowdown evidence in prices for core services excluding housing, “a category that accounts for more than half of the core PCE [personal consumption expenditures] price index.” Also, wages growing faster than 2% inflation would likely mean upward pressure on prices.

“The minutes from the FOMC January 31-February 1 policy meeting don’t change our view that the Fed is likely to boost the fed funds target range by 25bps at both the March and May meetings and to leave the fund rate at the terminal rate through the end of 2023,” wrote Oxford Economics in an emailed note. “The risk, given the economic and inflation data released since the last meeting, is that the Fed raises rates further.”

This week will bring another important factor in rate decisions. “Investors highly anticipate the upcoming comprehensive inflation metric this Friday and a lot is riding on the core services ex housing component,” Jeffrey Roach, chief economist for LPL Financial, wrote in a note. “The Federal Open Market Committee is hotly debating the risks to the inflation outlook while being more in agreement on the downside risks to economic growth. Therefore, the Committee will likely maintain the 0.25% cadence at next month’s meeting. The call for a 0.50% hike is overdone.”

However, even two more 25 basis point increases make another half a percentage point by midyear. Of course, depending on other indicators going forward, decisions could swing one way or the other, making planning more difficult than usual.