The choices of the Federal Reserve over the last year or two—and particularly in the last month—have been deeply scrutinized. After years of low rates and relatively loose monetary policy, the central bank was quick to slash rates to zero and unleash quantitative easing as the pandemic ravaged economies around the world. But starting in late 2021, inflation grew to be a top concern to policymakers, and the Fed moved (not quite as quickly) to begin raising rates again in 2022, in an attempt to cool down an overheating economy.
Now, here in 2023, that campaign of interest rate hikes may be coming to an end. After slowing down the size of the increases, and finally reaching its stated target of over 5% last meeting, many have hoped that the Fed and Chair Jerome Powell will push pause for now. Others—specifically in the real estate industry—have lobbied against further interest rate hikes, which would put more pressure on an already uncertain housing market.
With a little under three weeks before the next Fed meeting, the chance of more rate hikes—or even rate cuts this year—are extremely uncertain. Minutes from the most recent Fed meeting released this week reveal significant divergence from members regarding both the state of the economy and the best path forward, while some Fed members have made their opinions on further rate hikes public.
“In discussing the policy outlook, participants generally agreed…the extent to which additional increases in the target range may be appropriate after this meeting had become less certain,” the minutes say.
Dallas Fed President Lorie Logan, a current voting member of the Federal Open Market Committee (FOMC), which sets rates, told a conference of bankers last week that she was still worried about inflation, and leaning toward another rate hike in June.
“I’m keeping an open mind and a close watch on economic developments as we head toward the next FOMC meeting,” she said. “As of today, though, I remain concerned about whether inflation is falling fast enough.”
The meeting minutes—which do not attribute comments or ideas directly to individual members—show that some disagreed with Logan’s assessment.
“Several participants noted that if the economy evolved along the lines of their current outlooks, then further policy firming after this meeting may not be necessary,” the minutes say.
But at the same time, “some participants” wanted to ensure that no statement by the FOMC would be interpreted as either ruling out or affirming another rate hike in June, seemingly to ensure that either choice would not come as a shock to investors.
The great debate
Within the real estate industry, a further increase in rates is increasingly being viewed as harmful, with higher mortgage rates blamed at least partially for an uneven spring housing market. National Association of REALTORS® Chief Economist Lawrence Yun went so far as to call the most recent rate hike “unnecessary,” speaking to legislators and housing advocates in Washington, D.C., earlier this month.
National Association of Home Builders Chairman Alicia Huey has also pointed to rising rates as a headwind to getting much-needed new housing inventory to the market.
The effect of another rate hike on real estate is somewhat unknown. Demand has rebounded in some regions despite much higher rates, though there have been some recent indications that even pricier markets are affected by rates.
Powell, in previous public comments, has acknowledged that inflation from rent costs and other housing-related expenses is currently falling, and acknowledged that rates are weighing on the housing market while also arguing that inflation is a big danger.
Christopher Waller, another voting member of the FOMC, this week echoed Logan’s sentiment that progress has been too slow, and more hikes are possible.
“Bottom line, I am concerned about the lack of progress in any and all of these measures, and I have a couple specific concerns about some important components of inflation,” he told an audience at the University of California, Santa Barbara on Wednesday.
Those concerns include a “rebound” in the housing market, which Waller said could indicate that moderation in rent costs might not be as durable as many believe.
But echoing what Powell has repeated since the beginning of the rate hike campaign, Waller said he would be basing his decision off upcoming data, including a PCE report this week and another CPI inflation release in June (coming on the first day of the FOMC meeting).
“While we are seeing some tentative signs of cooling in the labor market, I am determined to continue to use our policy tools as needed to appropriately bring inflation down to 2%,” Waller added.
Banking on the run
Looming over all recent Fed discussions and speeches are the bank failures, which began in March with the sudden collapse of tech-focused Silicon Valley Bank. Economists and policymakers remain concerned that a cascading effect could spread to other banks and cause exponentially more harm to the larger economy.
According to the Fed minutes, the conditions created by banking instability, “had led them to raise their already high assessment of uncertainty around their economic outlooks.” Though some FOMC members said the banking industry overall was well-capitalized and issues were “limited to a small number of banks with poor risk-management practices or substantial exposure to specific vulnerabilities,” others noted that “weak fundamentals” in commercial real estate created more vulnerabilities.
Logan, in her remarks last week, emphasized the importance of the Fed’s role in providing a “liquidity backstop” in times of crisis, citing the central bank’s role in calming markets after recent bank failures as well as navigating the turmoils of the pandemic.
As far as how the bank issues could affect the broader economy, Logan said current data suggested only a “modest further drag” from tightening credit. She added that interpreting the repercussions of bank stresses remain ongoing.
Waller, discussing whether to “hike, skip or pause” rates in June, said he expects to have a “clearer idea” about how bank failures have affected credit conditions nationwide.
“If banking conditions do not appear to have tightened excessively, then hiking in July could well be the appropriate policy,” Waller said.