Fed Raises Interest Rate For 10th Time In Effort To Reach Inflation Goal

Federal Reserve officials announced yet another hike to the base interest rate Wednesday, the 10th increase in just over one year as the central bank seeks to bring down inflation.

As expected, the Federal Open Market Committee raised the target range for the federal funds rate by 25 basis points on Wednesday, bringing the range to 5% to 5.25%, the highest range since 2007, just before the Great Financial Crisis, and the fastest set of increases since the 1980s. 

The committee made the move in spite of the third recent major bank failure last weekend and the risk to the world economy posed by the federal debt ceiling dispute.

High interest rates — relative to pandemic-era lows of virtually zero, at least — have put the squeeze on the volume of commercial real estate deals since the Fed started raising rates last year. They have also precipitated the bank failures since March, as the value of their older mortgages and securities dropped rapidly.

The Fed announced the rate hike with a statement on Wednesday afternoon, followed by a press conference by Federal Reserve Chairman Jerome Powell. The statement hinted at a willingness among FOMC members to pause rate increases, should their interpretation of the economic data tell them it is necessary.

The Fed's statement stressed that the committee's additional moves would depend on the information that crosses its members' desks. Paying attention to data is something the Fed usually says it does, but notable this time is what the central bank left out of its statement, compared with the previous one: The phrase “[the] Committee anticipates that some additional policy firming may be appropriate" was missing.

Powell acknowledged the importance of the change in language during his press conference.

"We're no longer saying that we ‘anticipate,’" Powell said. "We'll be driven by incoming data, meeting to meeting. We'll approach that question at the June meeting."

Powell didn't commit one way or the other about a pause in rate hikes, however, as is the usual practice in public statements by the chairman.

“A decision on a pause was not made today," Powell told reporters.

Forward guidance is over! The Fed will now truly be responding to data going forward, not slowly (or quickly) making its way to a set end point.

That's good and appropriate.

I expect that data to drive them to a few more rate hikes but we'll see. No need for them to say now.

— Jason Furman (@jasonfurman) May 3, 2023

“The Fed indicated by what it didn't say that this might be the end of rate increases,” said Michael Lefkowitz, managing member of Rosenberg & Estis, a New York-based law firm specializing in real estate.

A cessation of rate increases would offer a measure of stability to the real estate industry, he said — and with it, perhaps enough breathing room to allow activity to pick up again among lenders and investment markets.

“It's a slight sign of hope for some of the struggling real estate in New York and nationally,” Lefkowitz said.

Though many industries have been impacted by the higher cost of money, interest rates have hit the commercial real estate industry particularly hard, not only as deals have become more expensive but as lenders tightened standards.

That has put downward pressure on valuations. Commercial property prices are down sharply compared with a year ago, according to Green Street, with its commercial property price index down 15.2% from March 2022. The index is off 0.2% compared with February 2023.

Even the largest investors are seeing fallout from the declining CRE market. Blackstone Inc. reported last week that its first-quarter distributable earnings tumbled 36% compared with the same quarter a year ago, chalking up the contraction to a weak commercial property market even as its credit and insurance funds did better.

The FOMC cited persistent inflation as the reason for a rate increase. As of March, the annualized inflation rate is 5%, and the so-called core inflation rate, including all items minus food and energy, was even higher at an annualized 5.6%. At those rates, inflation remains well above the central bank's target rate.

Moreover, the much-discussed recession hasn't happened yet, though parts of the economy are cooling. Real gross domestic product came in at 1.1% in the first quarter of 2023, down from 2.6% in the fourth quarter of 2022, but still growing. Unemployment remained at a low 3.5% in March, and over the last 12 months, wages have risen 4.2%.

There are also indications that hiring remained robust in April, though wage hikes might be slowing somewhat, with the latest ADP Jobs Report predicting a net of 296,000 new jobs in April. The government's jobs numbers will be reported on Friday.

“At the beginning of this year we were expecting to see a recession in several economic regions, and that hasn’t actually come through,” Union Bancaire Privée co-Head of Global Equities Eleanor Taylor Jolidon told Bloomberg. “There was quite a big relief to see that the first quarter has gone quite well across a number of sectors.”

Powell is feeling better about a soft landing: "The case of avoiding a recession is in my view more likely than that of having a recession."

— David Beckworth (@DavidBeckworth) May 3, 2023

After this rate hike, the question becomes whether there will be more, if the Fed halts for now or if it will even reverse course, especially if the economy goes into full-blown recession.

"The shift to Fed rate cuts ... seems much less likely to come as early as the market prices, unless we see a far clearer deterioration in growth than we expect," Goldman Sachs said in a note to its clients ahead of the latest rate hike, as reported by Seeking Alpha.

The Federal Reserve has been clear all along about its purpose in accelerating interest rates.

“Without price stability, the economy does not work for anyone,” Powell said during a speech in Jackson Hole, Wyoming, in August 2022. “In particular, without price stability, we will not achieve a sustained period of strong labor market conditions that benefit all.”

UPDATE, MAY 3, 5 P.M. ET: Comments from Michael Lefkowitz and Federal Reserve Chairman Jerome Powell’s press conference have been added.