Federal Reserve Resumes Interest Rate Hikes With 11th Increase Since Early 2022

As was widely expected, Federal Reserve officials announced another interest rate hike Wednesday afternoon, causing real estate companies to settle in for yet more price compression and sluggish financial markets.

The increase came on the heels of positive inflation news earlier this month, but Federal Reserve Chairman Jerome Powell indicated in a press conference Wednesday that although the 3% top-line inflation growth is good news for the economy, a closer look shows that there is still room for the cost of living to come down.

“It is a good thing that headline inflation has come down so much because that's really what the public experiences,” he said. “It will strengthen the broad sense that the public has [that] inflation is coming down, which will, in turn, we hope, help inflation continue to move down.

“Core inflation is still pretty elevated. There's reason to think it can come down, but it's still quite elevated.”

Core inflation was up 4.8% year-over-year in June. The central bank's longstanding target for inflation is 2%.

Wednesday’s 25-basis-point bump was the 11th increase since early 2022, when the rate was essentially zero. Now the benchmark rate is in the 5.25% to 5.5% range, roughly the same as just before the Global Financial Crisis.

Housing costs remain the primary concern. Rent and mortgage payments now account for over 70% of the increase in inflation, according to the Bureau of Labor Statistics. 

So far the U.S. economy has avoided recession, with real gross domestic product increasing at an annualized rate of 2% in the first quarter of 2023. Second-quarter numbers will be reported Thursday. In June, the national unemployment rate was 3.6%.

The real estate industry has suffered various slings and arrows lately, with high interest rates putting intense pressure on property markets. Green Street reported that CRE prices dropped another 0.8% in June, with prices down 16% from a March 2022 peak.

“Transaction volumes are depressed as sizable bid-ask spreads persist, and debt capital remains more expensive and harder to access,” Green Street analyst Alex Boyle said in a statement. “Pricing changes have varied significantly across property sectors; office values are down more than 30% since the March ’22 peak, while lodging and industrial values have proven more resilient.”

Although the decision was expected, Moody’s Analytics Head of Commercial Real Estate Economics Thomas LaSalvia said in a statement Wednesday he didn't agree with the hike.

“Do I think they should have done something different? Yes,” LaSalvia said in the statement. 

“One more meeting of a pause, with two more jobs reports and [consumer price index] reports before the next meeting in September would have given enough data to truly determine the best next steps,” he wrote.

Still, the overall slowing of rate increases and the favorable inflation news has some in CRE feeling hopeful.

“I'm probably more optimistic than I am pessimistic,” Ashland Greene Capital CEO Shakti C’Ganti said.

“We're just battening down the hatches right now with our properties, our cash and our expenses and holding on for the next 12 to 18 months, being really thoughtful about the types of properties that we buy,” C'Ganti said, adding that he believes the current slowdown is shallower than the one that followed the Global Financial Crisis.

Powell didn't commit the central bank to a pause at its next meeting, which is in September, or another rate hike, stressing as usual that the Fed will watch the economic data closely, then make its decision. The expectation broadly is that at least one more rate hike is in the cards.

“My initial reaction is [Powell] left the door open for another interest rate hike in the September meeting, or one of the next meetings coming up after that this year,” StackSource Director of Capital Markets and Underwriting Huber Bongolan told Bisnow. “He didn't entertain the idea of a rate drop.”

At this point, Bongolan said, it is important for the Fed to be consistent with its messaging, which so far it has been able to do.

“We can afford to be a little patient, as well as resolute, as we let this unfold,” Powell said at the press conference. “We think we’re going to need to hold, certainly, policy at restrictive levels for some time, and we’d be prepared to raise further if we think that’s appropriate.”

UPDATE, JULY 26, 6:28 P.M. ET: This story has been updated with comments from Jerome Powell, Shakti C'Ganti, Thomas LaSalvia and Huber Bongolan.