MID-DECEMBER ECONOMIC UPDATE
Written by: Harrison LaHaie
What’s in the News
The Federal Reserve announced a 50-basis point rate hike following three 75 basis point hikes, making the new Fed Funds rate 4.25-4.5%. In their new projections, they see the Fed Funds rate reaching 5% in 2023 and remaining there until 2024. FTX Owner Sam Bankman-Fried was indicted on the charges of criminal fraud and conspiracy. Inflation eased slightly in November, rising by only 0.1%, making it up 7.1% year-over-year, compared to Octobers 7.7% year-over-year rise. Core CPI also fell from October.
What's Next for CRE
The news from the Federal Reserve continues to be unfavorable for CRE. With the rates set to run high for the next year, CRE will have to continue to adjust. Inflation is coming down, but the Fed will likely only taper rate hikes as opposed to switching to rate cuts. Sectors such as office will continue to have headwinds. Furthermore, the high-rate environment will make it difficult for the economy to remain robust. At some point, economic headwinds will catch up and reel in demand. This will have trickle down effects for CRE, especially sectors such as industrial that are derived from consumer demand.
Although Fed officials have marked rates to reach 5% next year, their long run equilibrium rate remains around 2-2.5%. This means positive real interest rates for at least the next year. Thus far the economy has held up with some bumps in the road. However, prolonged positive real interest rates means that something will break. Inflation has started to come down, but it is still nowhere near where the Fed needs it to be. Until then, interest rates will remain well over that 2.5% equilibrium rate to bring inflation back under control. With the Fed predicting rates to rise in 2023 and remain high until 2024, it is too much time for weakness not to show up in the labor market. When the labor market eventually feels the effect of interest rates, then the Fed will be forced to pull back in a big way.
Sources: Globe St, WSJ, First Trust, Federal Reserve.