Amid signs that price growth in the U.S. economy is rapidly cooling, the Federal Reserve announced Wednesday (12-14-22) it was slowing the pace of its rate-hiking program designed to tackle inflation — but that more hikes were still on the table.
The Federal Open Market Committee said it was increasing its key federal funds rate by only 0.5% this time around, after raising fed funds .75% at its previous 4 meetings. In its Wednesday statement, the Fed said it continues to target an inflation rate of 2% over the long term and would continue to increase the federal funds rate to do so.
November headline inflation came in at 7.1% Y-O-Y. This current 50 basis point rise makes fed funds 4.5% … still a healthy gap below inflation. While the fed acknowledged improvement in the inflationary numbers, they reiterated their commitment to bringing inflation down to the 2% long range target, and that achieving this would likely require additional rate increases in 2023, although less aggressive than has been the case this year. Their estimated rate for end-of-year 2023 is 5.25%. Their duration of holding this rate may go into 2024.
The other side of the bad news coin is the economy’s response to the inflation fighting activity – the expected and now well-publicized recession. Historically the economy has lagged changes in monetary policy by 9 months to a year. Interest rate hikes and quantitative tightening beginning last March should be expected to damage the economy by Q2-23, possibly a month or so earlier. Other contributing factors operating in the economy, however, cloud the issue, namely, supply chain disruptions, fuel shortages, COVID-related occurrences and individual country responses, the Ukraine-Russian war, and Iran, China & North Korea combative mischief to name a few.
The fed has made clear their willingness to accept a recession with accompanying rise in unemployment if that’s what it takes to put the inflation genie back in the bottle. The fed estimates unemployment in 2023 could hit 4.6%, up from the current 3.7%. Not even 1% – not too bad, you say. Please consider: there are about 150 million people that make up the labor force (pre-COVID participation rate). One percent is about 1,500,000 people. That’s potentially a lot of mortgages, car payments and credit card bills that may go unpaid. We say potentially because there’s still a lot of “excess savings” in the bank, but the amount is dwindling. Over the last couple months the savings rate has decreased and credit card balances have increased. Not a good trend. If we can write about this you can believe lenders are aware of it. Now you are too!
The lenders dilemma is that they have a lot of lending capacity – idle funds in excess reserves at single digit basis points. They need to get this placed into loans in a “prudent manner”. This is not just bank money. Private equity funds, hedge funds, etc. have a similar problem, just not encumbered by banking regulations.
This is a complex environment to be sure, and a dicey marketplace to enter. The lure of distressed or compromised CRE properties with above market cap rates is difficult to pass up. We’ve recently started to see cap rates rise to reflect all of the above activities. We believe they’ll continue trending higher in ’23.
You want to start suiting up now for the opportunities ahead.
Remember, when crossing the mine field, go with the guy who has the mind detector.
We work for you, not the lender.
Today’s post is written by Michael Green, Commercial Loan Originator for Counsel Mortgage Group, LLC.
Counsel Mortgage Group®, LLC
Licensed in Arizona, California, Hawaii and Illinois
480-502-1000
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