Fed raises rates again, but signals possible pause ahead

The Federal Reserve hiked interest rates by another 0.25 percentage points Wednesday, a modest bump that pushed rates above 5 percent for the first time since 2007. 

But Fed Chair Jerome Powell implied that the central bank could take a break from its year-long string of rate increases at its next meeting. That reprieve could offer commercial real estate investors the clarity needed to close on deals stymied by uncertainty in recent months. 

Powell did not promise a pause come the Fed’s next meeting in June. 

Rather, he clarified that language used by the Federal Reserve Committee in March that “some additional policy affirming may be appropriate” — a reference to more rate hikes — was excluded from Wednesday’s statement.

“That sentence is not in the statement any more,” Powell said. “That’s a meaningful change.”

Now the committee will review data on economic activity, jobs and inflation ahead of its five remaining meetings this year to determine whether subsequent hikes are needed.

The collapses of Silicon Valley Bank and Signature Bank in March, then First Republic earlier this week, drove banks to tighten credit conditions to rein in loan growth and hold on to liquidity. 

That reaction did some of the Fed’s work for it, as fewer loans means consumers and businesses will spend less, possibly easing inflation. 

“I think what has changed [for the Fed] is the thinking about longer-term implications of the regional bank issues,” Fannie Mae Chief Economist Douglas Duncan told The Real Deal ahead of the Fed’s announcement Wednesday. 

Duncan said the lingering question is whether that tightening will be enough to slow the economy to a level that achieves the Fed’s goal of 2 percent inflation. 

Commercial real estate deals have stalled after 14 months of rate hikes, as buyers, unsure of where rates might land, balk at asking prices and sellers refuse to close at lower numbers. 

A sense that rate hikes are in the rear view mirror would offer both parties some needed momentum to get deals done. A rate decrease could spur investment sales even further. The markets currently project two cuts in the second half of the year, Duncan said. 

Fannie Mae, though, predicts just one cut — in December, Duncan added. 

“If the Fed doesn’t see rising concern from the regional banking issue, it’s going to take longer for them to get the reaction to inflation they’re looking for,” Duncan said.

“When Powell says ‘We will stay higher for longer,’ we’re taking him at at his word,” the economist added.