Nothing new to see here!
As widely predicted, this afternoon the Fed raised the fed funds rate another quarter of a point, now to a range of 4.5 – 4.75%. This will take the prime rate tomorrow to 7.75%. Perhaps as importantly, this puts the Fed within ½ to ¾ % of what is widely suspected to be it’s “terminal rate” for this round of escalation. At that level, it’s believed, the Fed will have cause to pause from further increases and let the economy react and stabilize in the new interest rate environment. Bear in mind the Fed let the market stabilize in the new “zero-bound” environment for a decade! Expectations to hit that terminal rate are another ¼ % increase in March and again in May.
The Fed will be looking for economic evidence that inflation is on its way to that seemingly magical 2% level, perhaps something akin to hunting unicorns. Meanwhile, will the economy continue to maintain its erratic struggle to keep from sliding into a recession? Current evidence of leading indicators, opinion polls, etc., suggests not. Maybe inflation in the low 5’s or even high 4’s is possible, if not likely, but 2% is probably a long shot.
Historically, interest rates have had to be a point or more higher than inflation to have the desired effect of reducing inflation. Bear in mind, though, that the Fed has quantitative tightening (QT) going on. It wouldn’t appear, however, that fed funds at 5% and inflation at 5% would provide the spread to meaningfully reduce inflation.
Pause vs. pivot – a notable difference. Smart money, if implied by the futures market and bond market yield curves, suggests the pause level of 5-5 ½% may be maintained for several months or even years. The pivot, however, i.e., reducing rates, will not occur until: (1) inflation hits 2% “on a sustained basis”, or (2) the economy has sunk so badly that we can’t take it anymore. We’d place our money on scenario #2. This may very likely be influenced by the ’24 election, with consideration of this surfacing in Q1 or Q2-24 … about a year from now.
All this is nice to know, but what is a borrower to do?
At Counsel Mortgage, we pride ourselves on being able to provide good “counsel” to our clients. But to do this, we need to keep an eye over the fence and know what lenders are doing, lest we try to fit a square peg into a round hole. Much as borrowers want to get that loan to acquire that good-deal property, they sometimes pause when they actually get an offer from the lender. This brings up all kinds of “what if’s”, the manifestations of this high-risk environment. Lenders have similar reactions when they have the opportunity to lend to the “too-good-to-be-true” borrower, although the “what-if’s” are different.
Left to their own skills, talents, and emotions, loans done directly between lenders and borrowers are difficult, at best, to get done, and many don’t. Sometimes what is needed is the objective intermediary or consultant. Sometimes these are called mortgage brokers.
If you’re having difficulty securing a lender for your commercial real estate loan, give us a call. We may be able to help. 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
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