Fed Holds Off On Raising Interest Rates For Second Time In A Row
The Federal Reserve announced Wednesday that it won't raise the federal funds rate for now, keeping the base rate at 5.25% to 5.5%.
Speaking at a press conference after the announcement, Federal Reserve Chair Jerome Powell left open the door to further increases at an unspecified time in the future, just as he did during September's meeting, but didn't commit to any such action.
“In determining the extent of additional policy firming, it may be appropriate to return inflation to 2%,” Powell said. “Over time, the committee will take into account the cumulative tightening monetary policy, the lags with which monetary policy affects economic activity, inflation and economic and financial developments.”
By itself, the lack of action doesn't mean very much for commercial real estate, BGO Chief Economist and Head of Research in the U.S. Ryan Severino told Bisnow by email Wednesday, since interest rates are already elevated and interest rate volatility remains high.
“However, the slowdown in the pace of rate hikes in 2024 suggests that the Fed is much closer to the end of the tightening cycle than the beginning,” Severino said.
“Even so, more certainty would really support the market,” he said. “While the Fed continues to play this game of 'we might be done hiking, but we might not,' then don’t expect many signs of stabilization in the market. Foregoing a rate hike doesn’t hurt the market, but it isn’t going to provide a lot of benefit either, at least in the short run.”
The Fed declined to act even though inflation remains elevated over its longstanding target of 2%. In October, the consumer price index put the annualized U.S. rate of inflation at 3.7%. The so-called core rate of inflation, which doesn't include volatile food and energy prices, came in even higher at an annualized 4.1% in October.
“What we're picking up is the Fed is seeing elevated inflation that coincides with the stronger-than-expected GDP numbers,” Bayport Funding Head of Origination Harris Lukashok said. “So their position is now wait and see.”
Though he didn't make a prediction about what the central bank might do at the next Federal Open Market Committee meeting in December, Lukashok said that among those who are making such predictions, the percentage of those that expect an increase has increased in recent weeks but still represent the minority among those making such predictions.
To some extent, CRE is adapting to the new, and seemingly long-lasting, interest rate environment, he said.
“As developers get used to a new rate environment, they're going to be pursuing transactions that make sense, even in the higher rate world, which will hopefully embolden lenders to lend into those business plans,” Lukashok said.
The rate is the highest it has been in more than two decades. The last time the rate was higher was in May 2000 when it peaked at 6.25% to 6%. In June 2006, just ahead of the credit freeze that preceded the Global Financial Crisis, the rate touched 5% to 5.25%.
Powell asserted that holding steady two meetings in a row isn't going to influence FOMC decision-making during the December meeting, the committee’s last of 2023.
“The idea that [it] would be difficult to raise again after stopping for a meeting or two, it's just not right for me,” Powell said. “The committee will always do what it thinks is appropriate at the time.”
Reducing inflation is likely to require a period of soft growth and some weakness in labor market conditions, Powell said.
UPDATE, NOV. 1, 4:23 P.M. ET: This story has been updated to include comments from Jerome Powell and Harris Lukashok.
CORRECTION, NOV. 2, 12:30 P.M. ET: A previous version of this story incorrectly quoted Harris Lukashok on the expectation of a federal funds rate increase. It has been corrected.
