Today’s blog is written by Michael Green, Commercial Loan Originator for Counsel Mortgage Group, LLC

It’s well-entrenched in market participants’ minds by now that the Federal Reserve’s
target rate for inflation is 2%. While that goal is admirable, we are still in a period of “sticky” pricing pressure, making the central bank’s target seemingly difficult to achieve.

The most recent CPI report for December included components that showed some
sectors of the economy are still facing persistently higher costs. History shows that once entrenched in an economy, inflation tends to be “sticky” indeed. Sector rotation among goods and services, imports and exports (we’re a global economy after all), government spending (all the governments), supply line shortages and surges, natural disasters, wars and conflicts, and of course monetary policies of all the central banks, all affect pricing in the market. Herding all of the variables into the corral at one time is barely conceivable.

The main message from the report was that while inflation is improving, it has lost some of its downward trajectory – dropping from 9.2% to 3.9% was the easy part. Falling to 2% is becoming more arduous. As a result, the Fed is unlikely to cut interest rates as quickly as the market anticipates.

According to the current CME FedWatch Tool*, there is a 46.2% probability of the Fed
cutting the Fed Funds rate by a quarter-point to 5.00%-5.25% at the March 20 FOMC
meeting and a 50% chance of a second quarter-point cut at the May 1 meeting.

*CME FedWatch Tool: an online analytical resource from the CME Group that
estimates the probability of federal funds rate changes by the Federal Open Market
Committee (FOMC) at upcoming meetings. CME Group Inc. is a financial services
company. Headquartered in Chicago, the company operates financial derivatives exchanges including the Chicago Mercantile Exchange, Chicago Board of Trade, New York Mercantile Exchange, and The Commodity Exchange.

One may argue that as we move through 2024, barring a broad-based and prolonged
recession, inflation will probably run around 3%-4% on an annual basis. While
seemingly unable to achieve their 2% target over the lengthy time of trial, it may be expected that monetary authorities will likely raise their long-term target from 2% to 3%. The justification may be to “recalibrate” the acceptable inflation rate level to the then-new economy. (What may make the economy “new” we might ask?)

The equity markets appear perfectly fine with this possible outcome. The U.S. 10-year Treasury yield has risen from 3.78% to 4.20% in the past month with the Dow Jones Industrial Average, S&P 500 and NASDAQ at new highs.

The idea of a market transition to a phase of slow but steady economic growth that
coexists with an acceptable rate of inflation may represent a notable and even acceptable development. If this is indeed the new normal, it suggests a period of
stability that both investors and policymakers may need to navigate and adapt to in
2024.

Ponder this if you will: If GDP stabilizes into a 1.5-2.0% “slow but steady” growth
phase, and inflation stabilizes into the 3-4% acceptable level, how does this translate into prosperity? (We invite your comments.)

Many investors, however, are buying into this theory, which may explain why the stock market is trading at record highs despite another bout of rising government bond yields.

Question: If this scenario begins to materialize as suggested, how will this affect
financing, either new or existing, of CRE?

Thank You for Your Attention