Economic Watch: After Quarter-Point Increase Today, Fed Indicates Rate-Hiking Cycle Nearing an End

Executive Summary

• The Federal Reserve raised the federal funds rate by 25 basis points (bps) today to a range of 4.75% to 5.00%, its highest level since September 2007.
• The Fed will extend its monthly reduction of securities on its balance sheet, another indication of continued monetary tightening.
• Compared with its earlier outlook, the Fed now expects weaker GDP growth (0.4% vs. 0.5% previously), lower unemployment (4.5% vs. 4.6%) and higher inflation (PCE 3.3% vs. 3.1%) in 2023.
• Fed members expect the federal funds rate to peak at 5.1%, indicating the potential for one more 25-bp rate hike this year.
• CBRE believes that the rate-hiking cycle is nearing an end. Inflation has proved stubbornly high but should further decline over coming months as the economy slows. Although another 25-bp rate hike is possible this year, we expect the Fed will begin cutting rates by the end of the year.
• Tighter lending conditions and a weakening economy will keep capital markets activity subdued in the near-term and inhibit leasing demand.
• We expect greater certainty on the interest rate outlook will provide a foundation for recovery later in 2023, particularly for capital markets activity.

March Fed Meeting

The Federal Reserve continued to take action to curb a robust job market and stubbornly high core inflation by raising interest rates 25 bps today to a target range of 4.75% to 5.00% and indicated that further monetary tightening may be necessary. The Fed will also continue its monthly reduction of securities on its balance sheet.

Today’s rate hike at a time of banking sector stress shows the Fed is committed to fighting high inflation. It also suggests that the Fed thinks it has done enough to stabilize the financial system. To that end, the Fed is now allowing banks to pledge their Treasury and mortgage-backed bonds as collateral valued at par to bolster liquidity in the banking system. Banks have borrowed $300 billion from this new Fed facility.

The Bottom Line

Although late to begin raising interest rates, the Fed demonstrated its commitment to price stability with an additional 25-bp rate hike today. The rapid series of rate hikes—nine in all since March 2022—is beginning to slow economic growth.

Although banks have access to substantial additional capital from the new Fed funding facility, we expect they will use this capital to bolster their balance sheets rather than make new loans. Banking sector stress, including deposit flight, will cause regional banks to tighten loan underwriting standards. This, along with weaker sentiment, will slow business activity and consumer spending.

CBRE expects that the Fed could raise rates by another 25 bps before it begins cutting them by the end of the year. Tighter lending conditions and a weakening economy will keep capital markets activity subdued in the near-term and limit leasing demand. However, greater certainty on the interest rate outlook will provide a foundation for recovery later in 2023, particularly for capital markets activity.

Figure 1: CBRE House View