Expert: It's Too Early to Tell If the Fed Engineered Its Soft Landing

The ultimate goal of the Federal Reserve has been to reduce inflation without pushing the economy into a recession, achieving the oft-cited soft landing — a feat that a growing number of economists believe might happen.

At least one analyst, however, warns the CRE industry not to get too hopeful.

“So far, it looks like they are doing a pretty good job, but we’re not at the finish line yet,” said John Chang, National Director of Research and Advisory Services at Marcus & Millichap.

The headline inflation rate has fallen from 9.1% last year in June to just 3% and the Producer Price Index is down even more from 11.6% in March 2022 to less than 1% in June this year.

Even Core PCE, the Fed’s favorite measurement has made progress, Chang said. Core PCE runs a month behind the other numbers, but it was 4.6% in May.

That’s slow but steady progress toward the Fed target of 2%, but there’s still a way to go, Chang said.

Next week, the Federal Reserve is expected to raise the overnight rate by another 25 basis points, taking the federal funds rate to the 5.25% to 5.50% range.

“Wall Street has pretty much already baked that increase in because Chairman Powell very clearly telegraphed that move at the press conference after their last meeting,” Chang said. “We are definitely seeing a loss of economic momentum. Job creation is steadily slowing and so is spending. The Federal Reserve’s effort to slow the economy is working.”

But Chang said they are coming to the point where things will become a little tricky.

“Using interest rates to steer the economy is kind of like steering a giant cargo ship,” he said. “After you start turning the wheel it takes a while for the ship to actually turn and if you turn the wheel too much the cargo ship will overcorrect, forcing you to spin the wheel in the other direction.”

The Fed started turning the wheel last year and in the third and fourth quarters they were “spinning the wheel pretty fast,” locking in four 75 basis point rate increases, and we’re just now starting to see the arc of the ship turning.

“We don’t know yet if they oversteered,” Chang said, “and we probably won’t know the answer to that question until sometime around the fourth quarter.”

If they turned the wheel too much, Chang said the US economy will dip into a recession, but one that would likely be very mild.

“From the way things look right now a relatively soft landing is looking increasingly probable and that’s a good thing for commercial real estate,” he said. “We’re seeing revived department demand with close to a hundred thousand units absorbed so far this year. Retail also looks like it’s performing well. Preliminary Q2 estimates show vacancy is pretty much flat for the first half of the year about on par with pre-pandemic levels.

“In net, the economy is slowing, but a soft landing looks like a real possibility, and structurally, most property types in most markets remain on sound footing,” Chang said.

“If rates stabilize and we achieve a soft landing the underlying demand derive should reassert, supporting commercial real estate fundamentals.”