Smaller 50bps hike suggests inflation is slowly being tamed
The Fed’s beginning to look a lot like Sisyphus.
The Federal Reserve ahead of the holiday raised its benchmark rate yet again on Wednesday – a 50bps jump following four straight three-quarter point hikes – as it seeks to tame the leaden boulder of inflation. The moves represent the Fed’s most aggressive maneuverings since the early 1980s.
While it’s proven hard to get inflation over the hill on to solid ground, it appears the Fed’s rate tinkering is working. “We have had a little bit of progress on inflation,” Richard Barkham, global chief economist and head of America research at CBRE, told Mortgage Professional America during a telephone interview. “As you approach the peak of the interest rate cycle, the Fed is going to potentially be just a little bit gentler. In other words, it had to undertake urgent action over the course of 2022. It’s coming to a point where it is not taking urgent action anymore. The pace of rate increases is easing.”
The 50bps hike following four straight three-quarter versions is by design, he suggested: “It doesn’t want to overtighten, but it doesn’t want to under-tighten,” Barkham said. “Because of the previous rate hikes and the progress we have seen with inflation, the Fed can slow the pace of interest rate hikes to make sure it gets the policy correct.”
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Which isn’t to say the central bank doesn’t have its work cut out for it. In their executive summary, CBRE’s researchers noted that the Fed will continue to reduce its $8.6 trillion balance sheet by $95 billion per month, putting upward pressure on long-term interest rates and the cost of debt for real estate investment. The Fed forecasts that GDP growth will slow to just 0.5% next year, and that core PCE (its preferred gauge of inflation) will end 2023 at 3.5%, researchers noted.
While the Fed’s moves are designed to cool inflation, the maneuvers could have a more chilling effect on the commercial real estate sector, researchers predict: “The Fed also revised its interest rate outlook, which is now in line with CBRE’s expectations that the federal funds rate will peak at a range of 5% to 5.25% next year,” researchers wrote. “Rising interest rates, along with CBRE’s expectation of a moderate recession in 2023, will limit real estate sales and leasing activity through the year.”
Like many economists, Barkham believes the Fed may have acted too slow in its inflation-busting efforts: “I think they probably left it too long to raise interest rates, but they wouldn’t be the only central bank in the world that made that mistake. And they did that, remember, under pressure from COVID where the alternative might have been a more serious economic collapse.”
But, on balance, the Fed has been able to make up for lost ground: “With the benefit of hindsight, they probably waited too late but since they realized the need – that inflation was a bit more problematic than they thought – they’ve taken exactly the right steps. Since they realized they needed to tighten, they moved very quickly to hold interest rates to the level they needed to be. Inflation is still elevated but it’s beginning to head in the right direction.”
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Yet in the short term, consumers will feel the pinch, Barkham suggested: “Obviously, mortgages have become more expensive, credit card debt is more expensive. Probably you’ll begin to see some decline in house prices. To the extent that consumers like to have that housing equity, consumers balance sheets are going to be a little bit weaker over the course of the year. We’ve already seen declines in the stock market.”
But there’s good news on the horizon too: “On the plus side, I think they’ll begin to see cheaper goods in the retail sector,” Barkham said. “As inflation falls, it will be led down by goods prices. So I think we’ll begin to see goods prices much lower, used car prices lower. Over the course of the year, some of the high rent we’ve seen in the multifamily sector will begin to ease as well.”
Those waiting for lower rates shouldn’t hold their breath, as they’re not expected until 2024 at the earliest. In a post-meeting news conference, the Federal Reserve System’s chairman, Jerome Powell, explained the need to continue battling inflation with the rate tinkering: “Inflation data received so far for October and November shows a welcome reduction in the monthly pace of price increases,” he said, adding it would take “substantially more evidence” that inflation is headed downward.
Until then, the Fed will keep running up that hill.
