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Written by: Harrison LaHaie

What’s in the News

Stocks have climbed recently, hoping that the Federal Reserve will soon reverse its rate hiking cycle. This hope came after U.S. non-farm payrolls grew at the slowest pace in over a year, and CPI fell again. Furthermore, U.S. Purchasing Managers index fell under 50, indicating shrinking economic activity. To the south, Brazil is undergoing a January 6th-esque disturbance, as supporters of former President Jair Bolsonaro have charged into Congress and the Presidential Mansion. In Europe, hopes of a warm winter cause many to predict a difficult economic situation for Russia, as Europe may be able to get through winter with relatively less natural gas.

What's Next for CRE

The Federal Reserve is unlikely to stop its hiking cycle any time soon. While the market is pricing in rate cuts before the end of 2023, multiple Fed officials have claimed that high rates will be necessary to tame inflation. Rate cuts could potentially be inflationary. For CRE, this is again not great news. The elevated rate environment will put further pressure on asset prices. Defaults on commercial loans have remained under 1% and do not seem to be at a major risk. In other words, this is not a replay of the Financial Crisis. However, the impending economic hardship may lead to slower deal flow as the economy struggles across the board.

Looking Ahead

The Federal Reserve is not likely to stop its rate hiking cycle any time soon. History shows that the Fed will keep hiking until the Fed Funds effective rate is greater than headline inflation. That is yet to occur with CPI at 6.5% and the Fed Funds rate at 4.25-4.5%. Furthermore, inflation coming down in recent months is significant, but CPI remains 4.5% above the Fed’s target of 2%. That gap must close before the Fed begins rate cuts. Another complicating factor is China’s reopening, which could potentially be an inflationary event as China has become a larger consumer and will begin spending more than the previous 2 years. With that on the horizon, the economic future is difficult to predict. All that can be said is that the Fed will likely keep raising interest rates for the time being, barring inflation coming down dramatically or the labor market falling apart.

Sources: Globe St, WSJ, First Trust, Federal Reserve.

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