The FOMC unanimously decided yesterday, the 27th, to boost its target interest rate, the fed funds rate, by 75 basis points (bps), or 3/4s of a percentage point, the second time in as many meetings it has raised rates of this magnitude, marking an aggressive tightening cycle to battle the decades-high inflation rate, increasing the likelihood of triggering a recession. (From today’s Q2 GDP, already triggered.)
The decision sets the overnight lending target rate for banks to 2.25% – 2.50%, which is the Fed’s estimate of the neutral rate, or the rate that neither stimulates nor restricts growth. The rate increase is the 4th in this tightening cycle, following an initial 25 bp hike in March, a 50 bp increase in May, and a 75 bp move in June. This latest rise will put the Prime Rate at 5.50%.
When asked at the FOMC’s post-meeting press conference where the path of rate increases would lead, Chairman Powell referred to the Statement of Economic Projections from the committee’s June meeting, and said rates were likely to move to between 3% and 3.5% by the end of the year, and perhaps by another 50 bps higher in 2023.
The consumer price index (CPI) report released in mid-July showed inflation at 9.1% in June. To provide a glimpse into the future, June’s PPI rate came in at 11.9%. These producer rates will find their way to the consumer soon enough. Aside from the factors causing inflation, the number itself would indicate that the Fed is substantially behind the curve. Prior inflation cycles suggest market rates need to be 2 -2 ½ % higher than inflation to beat it down.
In response to several questions about the possibility of entering, or already being in, a recession, Powell stated that data didn’t support this, but that price stability is the “bedrock” of the economy and the committee intends to move towards bringing inflation down at the expense of labor market slowing.
Just released this morning, Q2-22 GDP contracted at a 0.9% annualized rate in the second quarter. This is the 2nd straight quarterly decline satisfying the widely held definition of a recession.
The Fed’s policy retreat in Jackson Hole, Wyoming, occurs Aug. 25-27, and any statement Powell may make there could presage the committee’s stance for the September decision.
But not only has the Fed painted itself into a corner, but lenders have a dilemma too.
It seems they still have too much money to lend, and excess reserves at the Fed for still more loans! What we’ve found in the market is that lending rates are tracking the Fed’s increases, but slowly. What the Fed has engineered is extreme volatility in the market, with rates moving quickly, now up, but soon, perhaps ’23-’24, down. So, what is important to lenders, and we think should be to borrowers, are terms of a loan beyond just the rate.
This environment has created some excellent property acquisition opportunities for investors. Should you sideline yourself from considering these because of financing risk? Sometimes the financing risk can be more than offset by more attractive terms of the acquisition. Everybody can live with the reward of an investment. It’s analyzing the risk part that gets dicey. If you think we might be able to help, give us a call. It’s a no-risk phone call! We work for you, not the lender.
Today’s post is written by Michael Green, Commercial Loan Originator for Counsel Mortgage Group, LLC.