Fed Indicates Possible End to ‘Ongoing Increases’ After 25bp Hike
By Andrew Coen March 22, 2023 3:40 pmreprints
The Federal Reserve implemented a quarter-point interest rate increase Wednesday while also indicating that its pattern of hikes could be ending soon.
The largely expected decision was seen by analysts as a middle-ground move aimed at fighting inflation while also seeking to calm volatile market conditions erupting from the regional banking crisis that has engulfed commercial real estate financing these past two weeks. The Fed’s post-meeting statement said it anticipates “some additional policy firming may be appropriate” to bring inflation to its 2 percent target, marking a change from previous central bank language that used the phrase “ongoing increases.”
Fed Chair Jerome Powell told reporters Wednesday that banking developments in the last two weeks will likely lead to “tighter credit conditions,” but it is unknown how that will affect future interest rate decisions. He said the Fed’s interest rate target for the end of 2023 is 5.1 percent, and the central bank remains committed to bringing inflation down to 2 percent.
“It’s possible that these events will turn out to have very modest effects on the economy, in which case inflation continues to be strong, in which case the path may look different,” Powell said in his post-meeting press conference. “It’s also possible that this potential tightening will contribute significant tightening in credit conditions over time, and in principle that means monetary policy may have less work to do. We simply don’t know.”
The 25 basis point hike announced Wednesday afternoon, which placed the federal funds rate between 4.75 and 5 percent, was lower than the half-point increase economists had forecast following Powell’s March 7 testimony on Capitol Hill. The days following Powell’s remarks pointing to an overheated economy saw dramatic changes to market sentiment, with the collapse of Silicon Valley Bank (SIVBQ) on March 10 and Signature Bank (SBNY) 48 hours later spurring uncertainty for the regional banking system and CRE lending.
“There is already this tremendous spread built in between the cost of the money for lenders to pay their obligations versus where a lender might be in terms of the returns on investments in fixed-rate loans,” said Michael Lefkowitz, managing member at law firm Rosenberg & Estis. “We were already looking at a slowdown of deal activity in the first quarter, and I think with some of these bank failures and people taking a more cautious approach I could see lending remain a concern over the next several months.”
The central bank’s second consecutive quarter-point increase followed a half-point jump in December on the heels of four straight 75 basis point increases from June to November. The Fed has now executed nine straight rate increases overall creating a far different climate from near-zero short-term borrowing conditions the CRE industry enjoyed a year ago.
The dramatic interest rate shift over the past year prompted the Real Estate Roundtable to issue a March 17 letter calling for financial services regulatory agencies to implement a program arming lenders with flexibility to work with borrowers on “troubled” CRE debt restructurings. A similar initiative was established in 2009 amid the Global Financial Crisis (GFC) and 2020 during the height of the COVID-19 pandemic.
Scott Rechler, chairman and CEO of RXR Realty, pushed the Real Estate Roundtable proposal on CNBC’s “Squawk Box” Wednesday morning, stressing that it would buy time for the CRE capital markets to settle down and enable the private sector to tackle solutions. Rechler said “acting proactively” would help avoid a potential repeat of the government bailout that occurred in the 1980s with the Savings and Loan Crisis.
“There is $1.5 trillion of commercial real estate loans that are coming due in the next three years and these loans were made at periods of time when interest rates were near zero, so to refinance them today they are going to be at much higher interest rates, much lower values and now in an unprecedented illiquid marketplace,” Rechler said in his CNBC interview. “This was a slow-moving train wreck and has now picked up speed and is running out of control. So I think what you need to do in that situation is you want to try and slow down the train, you want to be able to try and cushion yourself and avoid further distress.”
As the big banks significantly scaled back lending following the Fed’s hawkish strategy to fight inflation starting last June, regional banks filled much of the void and provided capital to CRE sponsors. With regional banks now also facing headwinds, private lenders will be leaned on more heavily to carry the baton.
Marcia Kaufman, the CEO of Bayport Funding, which focuses largely on securing acquisition bridge financing for distressed multifamily and single-family rental properties on the road to stabilization, said her firm’s deal activity has remained active since regulators stepped in March 12 with a backstop plan to assist Signature and SVB depositors.
“We’re a balance sheet lender, and although our interest rates might have at one point seemed very high, they don’t seem that high right now,” Kaufman said. “As long as we know that there’s always going to be a takeout for these loans, we’re going to continue to underwrite those loans, and the borrowers are happy that they have access to capital.”
Kaufman added that she does not see the banking crisis leading to a deep economic downturn like what occurred in 2008 during the GFC since most loans, particularly with multifamily and SFR properties, have experienced enough of a rent spike over time to support debt service costs. She also noted that strong unemployment numbers are also aiding property owners with tenants now in a far better position to make rent payments than during the GFC.
David Nasatir, vice chair of law firm Obermayer Rebmann Maxwell & Hippel, said it is important that the Fed signals soon that its rate hikes will be halted or slowed, especially in light of how the market has responded to concerns about regional banks.
“The sudden flight to safety and the fears of banks collapsing has put tremendous pause on anybody wanting to do anything right now, and that includes the biggest of the big banks,” said Nasatir, chair of the business and finance department at Obermayer. “I think the Fed needs to take a pause on these things for some substantial amount of time to see how the economy is turning.”
Andrew Coen can be reached at firstname.lastname@example.org