While 2023 has been a very hard and challenging year in commercial real estate lending, the Fed may have – emphasis on ‘may’ – have sent us a signal of hope going into 2024!
When I elected to watch Chairman Powell’s press conference after the Fed’s rate hold announcement on Wednesday, I did so with fear and trembling. I generally struggle with both the statement itself and the inaneness from some of the reporters asking questions. While listening to the statement about the decision and their outlook on the economy, I couldn’t help but picture him has the lookout on the Titanic and thinking, ‘but it’s just a small iceberg’… 🙂 However, then came the questions and my outlook changed, and changed dramatically.
Most of the questions were the usual variations on old themes about dot plot models and their assessment of the economy going forward. Then there was the question about slowing or pausing the deleveraging of the balance sheet to which the chairman issued a flat ‘not even on the table’. That was unfortunate as the Fed’s bond sales are clearly part of the reason treasuries have risen so much over the past 12 months. Only a fool would believe $1 trillion (hard to even type that number!) sold in the past 12 months wouldn’t be competing with the federal government issuing $1.3-1.5 trillion in new debt. Even a 5 th grader would know that supply will drive the price down – and in our case therefore the rates up. However, our esteemed Fed doesn’t seem to see it that way. My heart sank as I believed the pause in rate increases for November was all we would get and might still see a December increase at a time when it isn’t needed and businesses need the certainty of knowing this frenetic
raising by the Fed is over.
Then came the question of the day – and likely the most important one which essentially asked if the economy showed signs of recession, would the Fed jump in and start reducing. Of course the chairman was somewhat evasive talking only about current data, meeting by meeting, ya dee daa dee daa… Then he said it! Chairman Powell said in still referencing the question that unlike any point in the past 18 months, the relative risks to the economy of increases versus decreases were in equilibrium! In simple terms, he acknowledged that inflation has come way down and that the risk of more increases might endanger the economy to the same degree as decreases might re-ignite inflation. That is a seminal shift from even a month ago. The Fed is basically now in a NEUTRAL stance on rates…
If you don’t believe that is significant, I would point you to the treasury and stock markets over the past 3 trading days. 10 and 30-year treasuries each dropped more this week and at any time since 2020 other than a brief time in November 2022. The only reasonable cause is the belief among traders that the long inexorable rise in rates had reached the top and the next moves will be down. Markets thrive on certainty and these press conferences over the past several months have offered zero certainty and that’s been reflected in both treasuries and equities.
While we still need the data to reinforce the Fed’s current stance, the evidence even today is economic activity is cooling with a jobs report that came in below expectations and as importantly a huge downward revision in last month’s data. If we are blessed with another month or two of benign core inflation data for CPI, PPI and PCE (the Fed’s preferred index), rates should hold firm. Then our next questions will be how soon and how far do they go down. The down is critical for the banking system and CRE lending. Lower rates put less pressure on the loan portfolio of ballooning CRE debt and make the delta between interest rates and cap rates more positive meaning higher loan to values. That should kickstart the CRE buying engine and at least get us moving again to some degree.
So while neutral is normally not the news you want to hear, in this case it was the best we could have hoped for! Now we need to see if the downward rate moves hold and if so how quickly the sale markets can begin operating again in Q1 next year. We will just have to see. But my hope (and bet!) is we will see a significant uptick in early 2024 and be at least functional and stable by mid-year.
Thank you Mr. Powell and wishing you a wonderful and happy Thanksgiving!
