Federal Reserve Chairman Jerome Powell began hiking interest rates in March 2022.
Jerome Powell
Chairman at the Federal Reserve
Not to sound hyperbolic, but it’s not an exaggeration to say Jerome Powell holds the commercial real estate industry in the palms of his hands.
Perhaps no single figure has impacted capital markets and CRE transactions more over the last 12 months than Powell, the former investment banker now entering his sixth year leading the nation’s central bank. In the name of taming runaway post-COVID inflation, Powell engineered the swiftest interest rate increases in 40 years. The benchmark federal funds rate rose from effectively zero in March 2022 to 5 percent by May 2023.
But Powell’s attempt to curtail inflation — all while simultaneously pulling back on the Fed’s historic balance sheet expansion, a process known as quantitative tightening — has wreaked havoc across CRE capital markets. Borrowers and lenders have swiftly curtailed transactions, the costs of interest rate caps have spiked for floating-rate deals, liquidity conditions are in a momentary stasis, and three of the nation’s largest regional banks failed in quick succession.
Christopher Thornberg, founding partner of Beacon Economics, criticized Powell’s leadership and said the Fed chair has compounded his own mistakes, first by putting too much money into the system during COVID to fight unemployment (and pushing the Fed’s balance sheet past $9 trillion in the process) which caused the inflation Powell now needs to fight, and second by pressuring the deposit base of banks after initiating quantitative tightening. That forced banks to sell their Treasury securities at a loss, and thus sparked further deposit flights.
“In pursuit of one goal, he blew up another one. Now in his pursuit of taming inflation, he’s blowing up the banking system,” Thornberg said. “It’s a comedy of errors.”
Powell signaled on May 3, following a 10th consecutive interest rate hike, that the Fed is likely to pause further rate increases in its attempt to quell inflation. He added that the federal funds rate could fall to 3 percent by the end of 2025, but emphasized his main concern is lower prices.
“We remain strongly committed to bringing inflation back down to our 2 percent goal,” Powell said during a press conference. “Price stability is the responsibility of the Federal Reserve. Without price stability, the economy does not work for anyone.”
But at what cost to the economy, specifically the financial system, will Powell create price stability for consumers?
The next 12 months will tell us an awful lot about the shape of Jerome Powell’s legacy.
