Economic Watch: Fed Continues Aggressive Tightening Path
September 21, 2022 3 Minute Read
- The Federal Reserve raised the federal funds rate by 75 basis points (bps) today to a range of 3.00% to 3.25%. This was the Fed’s third consecutive 75-bp rate hike.
- The Fed also raised its inflation outlook to 5.4% (Personal Consumption Expenditures) and lowered its GDP growth forecast to 0.2% for 2022.
- The Fed will increase the monthly reduction of its $8.8 trillion balance sheet to $95 billion from $47.5 billion beginning this month. This will put more upward pressure on long-term interest rates.
- CBRE expects that an economic recession likely will occur in H1 2023, with the federal funds rate peaking as high as 4.5%.
- Tighter financial and worsening economic conditions are causing commercial real estate investment volume to decline.
September FOMC Meeting
The Federal Reserve continued to take aggressive action to curb inflation, raising interest rates by 75 bps today to a target range of 3.00% to 3.25%. This was the Fed’s third consecutive 75-bp rate hike.
The Fed also announced that it will increase the monthly reduction of its $8.8 trillion in bond holdings to $95 billion from $47.5 billion beginning this month. This will put more upward pressure on long-term interest rates.
The Bottom Line
The Fed will continue its aggressive monetary tightening until core inflation, which excludes volatile food and energy prices, nears its 2% target rate and the labor market loosens. The need for tighter monetary policy to tame inflation makes it more difficult for the economy to achieve a soft landing, although that is still possible.
CBRE expects that inflation will moderate in the next six months as higher interest rates cool demand, supply chain disruptions ease and the strong dollar makes foreign goods cheaper. CBRE projects that inflation will end the year at around 8.0%. We expect that the federal funds rate will peak next year between 4.25% and 4.50%. Tighter financial and weaker macroeconomic conditions will weigh on real estate fundamentals, leading to lower real estate investment volume in Q4 2022 and the first half of 2023.