Investors Fret About a Possible Rate Hike
But they are likely jumping to conclusions too early and looking too much at information that may already be out of date.
The Federal Reserve released the January Federal Open Markets Committee meeting minutes and markets are going just a touch berserk.
As Bloomberg put it, “Investors are beginning to war-game how the Federal Reserve can manage a US economy that just won’t land, with some even debating whether interest-rate hikes will be needed only weeks after a steady run of reductions appeared all but certain.”
“The readjustment in thinking comes after last week’s consumer-price index for January came in hotter than expected and was followed three days later by the producer-price index for the same month, which confirmed that the Federal Reserve’s inflation fight isn’t over,” wrote MarketWatch.
It was only a few weeks ago that markets were certain about rate cuts being just around the corner. At the time, Fed Chair Jerome Powell took the unusual step of making an explicit statement that a rate cut in March wasn’t likely.
“We have a ways to go” to a soft landing, Powell said in answer to a question. “Core inflation is well above our target, on a 12-month basis. Certainly, we’re encouraged by the progress, but we’re not declaring victory at this time.”
Bill Dudley, former president of the Federal Reserve Bank of New York from 2009 to 2018, and a Bloomberg columnist, wrote that there is a lot of uncertainty the Fed still has to navigate. “That is, maybe the neutral, inflation-adjusted interest rate — the level that neither stimulates nor damps growth — is higher than Fed officials’ estimate of 0.5%, meaning that the current federal funds rate is less restrictive of growth,” he said. “I think this is right: Large and chronic fiscal deficits, together with public subsidies for green investment, have pushed up the neutral interest rate. If so, the Fed should hold rates higher for longer.” Then there are questions about the state of the labor market, with the Fed overestimating the impact.
“With so much needing to be clarified, Fed officials will necessarily be paying close attention to incoming data,” he added. “It’s possible that developments could push them to keep rates high well beyond May.” According to the FOMC’s schedule, that could mean July, September, November, or even into the end of the year or beginning of 2025.
No one knows and the minutes of the January meeting are already almost a month old. There’s been more data and will continue to be. The Fed has been fairly clear that they wanted to see nine months or a year of continuing good economic news. That isn’t the same as a sure sign of an increase instead of a cut. Market investors and traders are too jittery and ready to go to extreme expectations.
Aside from that, the Fed minutes explicitly mentioned banks and CRE loans. “CRE prices continued to decline, especially in the multifamily and office sectors, and low levels of transactions in the office sector likely indicated that prices had not yet fully reflected the sector’s weaker fundamentals,” they wrote. Whether overall rates stay high, fall, or even rise, commercial real estate financing will likely remain under close watch and tight availability, at least at banks where interest rates are traditionally the lowest.