Intelligent Investment

Economic Watch: Fed Hikes Interest Rates to 22-Year High

July 26, 2023 3 Minute Read

Artistic view of looking up at a ceiling.

Executive Summary

  • The Federal Reserve raised the federal funds rate by 25 basis points (bps) today to a 22-year-high range of 5.25% to 5.5%.
  • Affirming a data-dependent approach, the Fed indicated that it will “continue to assess additional information and its implications for monetary policy.”
  • Given the resilience of the U.S. economy and strength of the labor market, another rate hike this year cannot be ruled out. However, our assessment is that slowing inflation and economic growth will cause the Fed not to hike rates further.
  • Tighter lending conditions and a weakening economy will keep real estate capital markets and leasing activity subdued in the near term. We expect investor sentiment to improve as the path for interest rates becomes clearer later this year. This should result in increased capital markets activity in early 2024, followed by a revival in leasing activity.

July Fed Meeting

The Fed raised interest rates by 25 bps today to a target range of 5.25% to 5.5% and indicated that future changes in monetary policy will depend on incoming data, taking into consideration the lagged impact of tightening monetary policy on the economy. The Fed also noted that it will continue to reduce the size of its balance sheet by $95 billion per month.

The Bottom Line

Inflation is slowing as the pandemic’s impact wears off. The economy has been remarkably resilient in the face of rapid rate hikes and inflation is unlikely to fall to 2% with a continued tight labor market and an unemployment rate of only 3.6%. For this reason, another rate hike cannot be ruled out but we believe that the current rate of 5.25% to 5.5% will be enough to weaken the labor market. CBRE does not anticipate any Fed rate cuts until early 2024 and we expect the central bank will move deliberately to ease monetary policy slowly throughout the year.

We do not anticipate capital markets activity to pick up across the board until early 2024, with leasing likely to begin recovering by midyear.

Figure 1: CBRE House View

Image of data table