Central Bank Pushes Policy Rate by a Quarter Point, Suggests Pause To Come
Federal Reserve Board Chairman Jerome Powell delivers remarks at a news conference following a Federal Open Market Committee meeting on May 3. (Getty Images)
By Christine Cooper and Chad Littell
CoStar AnalyticsMay 3, 2023 | 1:55 P.M.
As broadly expected, the Federal Reserve’s policy-making committee voted to boost its target rate by another 25 basis points on Wednesday, the 10th consecutive rate increase since embarking on its most aggressive monetary tightening program in 40 years.
The policy rate is now set between 5% and 5.25%, its highest level since September 2007. The vote on this action was unanimous.
In its statement, the committee reiterated commentary from its March meeting noting the uncertainty over the extent to which tighter credit conditions are weighing on the economy. However, the statement removed its prior language of “ongoing increases … will be appropriate,” suggesting that a pause in additional rate hikes may be in sight.
In response to questions at his post-meeting press conference, Federal Reserve Board Chairman Jerome Powell noted headwinds for credit conditions include not only the monetary policy actions of the Fed but also the recent banking crisis, which together are weighing on economic activity. He noted that future policy decisions will depend on incoming data and will be made on a month-to-month basis as conditions change.
The decision to raise interest rates will further nudge an already tight debt market. With each incremental hike in the Fed’s policy rate, banks tighten credit conditions by reducing the amounts they are willing to lend, on commercial real estate as well as for other business purposes, and by raising the costs of those loans.
As a result, commercial real estate transaction markets are becoming increasingly locked up and activity is down 55% compared to the first quarter of 2022. However, the impact of the slowdown has not affected investment activity across property types evenly.
Compared to the five-year average of first-quarter sales activity between 2015 and 2019, the first quarter of 2023 showed capital pouring into industrial assets at levels above those seen before the onset of the pandemic. Similarly, investment capital continues to flow into retail and hospitality assets — albeit at a slower speed —wh ile allocations to office and multifamily assets are significantly reduced.
Other recent data has shown an economic slowdown is underway. Factory activity has contracted for six consecutive months, while the services side of the economy has slowed meaningfully since peaking in late 2021. The interest-rate-responsive housing market has seen sales activity slow dramatically since early 2022, as rate hikes pushed mortgage rates higher and eroded affordability.
And while the labor market remains tight, signs of loosening have appeared as the job openings rate has been on a downward path since its peak in March of 2022, job gains are slowing, and continuing claims for unemployment benefits are drifting higher. Moreover, consumer spending, the main driver of the economy, had stalled by the end of the first quarter, in inflation-adjusted terms. Most analysts expect the economy to fall into recession later this year.
Despite all other considerations, Chair Powell made clear in his comments that the committee’s focus on inflation remains firm. In prior statements, he has pointed to the importance of the so-called “supercore” inflation measure, or the personal consumer expenditures (PCE) price index for services outside of food, energy and housing services.
This measure has moved within a small range of 4.2% to 4.7% since August of last year and appears not as responsive to rate increases as the other components of the price index. Its persistence, in Powell’s view, is a reflection of the strength of the labor market and wage gains, necessitating continued monetary policy restraint.