Fed Holds on Interest Rates While Treasury Ups Borrowing

Wednesday was a day of borrowing news out of the government that brought some relief to those in need of financing. The Federal Reserve is holding steady the benchmark federal funds rate and the Treasury, while still increasing the number of bonds it plans to sell to deal with the national debt.

The combination of news means somewhat less direct and indirect pressure on interest rates, which is good, or at least less bad, for commercial real estate.

Both the federal funds rate and Treasury yields can affect commercial financing rates. The former directly moves pushing rates upward or downward as the rates that banks face in their overnight lending are reflected in what banks and others later charge. The latter is important because Treasury yields are a basic metric for calculating risk-adjusted returns. The more Treasury yields rise, the more investors demand for a return and the higher interest must grow to accommodate them.

The Federal Open Market Committee at the Fed pointed to indicators of good news, including strong but moderated jobs gains, a low unemployment rate, a “sound and resilient” banking system, and inflation that remains elevated. 

“Tighter financial and credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation,” the Fed wrote. “The extent of these effects remains uncertain. The Committee remains highly attentive to inflation risks.” 

The best news to markets was that they had looked for the result.

“As expected, the Fed held the federal funds target range steady at a range of 5.25%-5.50% at today’s decision,” said Bill Adams, chief economist for Comerica Bank, in prepared remarks. “The policy statement had two major changes. First, the statement upgraded the assessment of current economic data, reflecting the upside surprise from third quarter real GDP (4.9% annualized) and September’s payrolls report (336,000 monthly gain). Second, where the prior statement cited ‘tighter credit conditions’ as a headwind, the current statement cites ‘tighter financial and credit conditions’ — the change is a reference to the increase in longer-maturity bond yields and mortgage rates since the last decision.”

Then there was the Treasury announcement. 

“The U.S. Department of the Treasury is offering $112 billion of Treasury securities to refund approximately $102.2 billion of privately-held Treasury notes maturing on November 15, 2023,” the department said. “This issuance will raise new cash from private investors of approximately $9.8 billion.”

“Treasury plans to continue with gradual nominal coupon and FRN auction size increases, but at a more moderate rate in longer-dated tenors,” it also said.

Auctions are necessary to bring in the cash to settle maturing bond obligations, and investors knew there would be increases. But the “more moderate” language gave them increased confidence going forward. Early information showed 10-year yields closing at just under 4.76% yield. They had been over 4.80% since mid-October 2023. The downward move is good news to many.