With the first quarter ending and the economy remaining resilient (thus far), the consequences of Fed hiking have taken on a different meaning in recent weeks.
With banking disruptions complicating policymaking and clouding the outlook, the Fed is now overtly attempting to balance all three parts of its mandate: price stability, full employment and financial stability.
As expected, the Fed raised rates by 25 basis points (bps), matching the increase from the February meeting and down from the 50-bps increase in December. The Fed has now raised the target fed funds rate nine times since hiking began in March last year. The target rate now ranges from 4.75% to 5.00%, the highest since 2006.
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The Fed statement included a notable dovish turn in language regarding future rate hikes, from “ongoing rate increases” to “some additional policy firming may be appropriate.” The updated forecast shows a terminal rate of 5.1% in 2023, effectively just one more hike of 25 bps.
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The Fed acknowledged that while the banking system remains in overall good health, the disruption of recent weeks will likely tighten credit conditions. While the banking system appears resilient, especially after implementing the government’s lending program, the exact path forward looks uncertain, with the potential for greater downside risk.
Commercial real estate (CRE) was already headed for a slowdown this year. The additional drag on growth should only make for a more challenging environment.
This will likely put more downward pressure on rent growth and upward pressure on vacancy rates across property types and markets.
Yet given the marginal impact on the economy, we do not view this as a huge problem—just a matter of degree rather than a change in direction. Lower interest rates and a quicker end to tightening could potentially help, but that remains unclear against the backdrop of weakening fundamentals.
The market would benefit from the Fed signaling when it plans to end its streak of rate hikes, but we are not there yet.
(By Ryan Severino, Chief Economist, JLL)
