Higher for Longer? – September 25, 2023

Last week’s announcement from the Federal Reserve’s Federal Open Market Committee was as expected: no rate increase for September. However, the FOMC statement made it clear that the job of containing inflation isn’t finished, as far as the Fed is concerned. 

Industry experts took the longer-term view. “The majority of FOMC members still expect another hike this year, even though core inflation has slowed,” said chief economist Mike Fratantoni at the Mortgage Bankers Association. “And many FOMC members now expect that the pace of cuts in 2024 will be somewhat slower than they had thought in June.” 

Avison Young said its forecast calls for the Fed to maintain the funds rate at its current level until at least the spring of 2024, “to ensure inflation does not see a second burst during the last quarter. If the data in spring 2024 points to growth becoming the greater concern over inflation, we anticipate that the Fed will initiate rate cuts from Q2 2024 onwards, with the funds rate gradually falling to 4.50%-4.75% by the year-end. 

“Rate hikes to date have slowed investment activity—there is still a wide gap between buyers’ and sellers’ expected pricing bringing about an asset value correction, so it is welcome news that the cost of debt will not rise this month,” according to a statement from Avison Young. “The market will be seeking certainty on whether we are now at the peak for interest rates, as that would encourage opportunist investors to take advantage of lower prices and start buying again.  

“However, central banks always speak in caveated language – they will never say ’this is the peak’ unambiguously to keep their options open. It may take a few months for real estate investors to feel comfortable that interest rates won’t increase, which will push any rebound for the market further down the line, perhaps to December or early 2024.” 

At the National Association of Realtors, chief economist Lawrence Yun said, “The Federal Reserve is rightly on pause and is looking for more data before determining its next course on interest rates. With fewer job openings, slowing job gains, and softening core consumer price inflation, the Fed must consider the potential economic damage arising from any future rate hikes.  

“Moreover, commercial real estate has come under stress from higher interest rates, which will further negatively impact community banks due to their large exposure to the sector. Therefore, the Fed needs to wait and not raise rates. Possible interest rate cuts then need to be considered once inflation is fully under control.”