September interest rate hike could happen, Fed minutes show

Central bank notes “strong” CRE lending market

Janet Yellen
Janet Yellen

The Federal Reserve appeared to keep an interest rate hike on the table for September amid “fairly accommodative” commercial real estate financing markets, according to its July meeting minutes published on Wednesday.

“Participants generally agreed that the prompt recovery of financial markets following the Brexit vote and the pickup in job gains in June had alleviated two key uncertainties about the outlook,” the minutes of the Federal Open Market Committee (the Fed’s policymaking body) meeting read.

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The central bank raised rates in December 2015 for the first time in almost a decade but delayed subsequent rate hikes amid capital market turmoil and political uncertainty over Britain’s future in the European Union.  The Fed decided to keep rates unchanged in July, but the newly released minutes show it is somewhat confident in the U.S. economy, making future rate hikes more likely. As usual, monetary hawks and doves in the committee appeared to disagree over how soon to raise rates.

In their financial markets review, Fed staffers described commercial real estate lending as strong on balance. But they noted that rates on commercial mortgage backed securities remain high, “a factor that likely contributed to depressed CMBS issuance so far this year.” The staffers also pointed out that banks have shied away from construction lending, as The Real Deal reported earlier this year.

The Fed makes monetary policy in part by setting a target range for the federal funds rate – the benchmark interest rate banks charge each other for overnight loans. Higher short-term rates tend to spill over into higher long-term interest rates, which raise the cost of real estate financing and can put downward pressure on property prices. In its August issue, TRD broke down how changes in long-term interest rates impact the real estate market.