Economic Watch: Fed Hints Today’s Quarter-Point Rate Hike May Be Last of Cycle
May 3, 2023 3 Minute Read
- The Federal Reserve raised the federal funds rate by 25 basis points (bps) today to a range of 5.00% to 5.25%, a 16-year high.
- Today’s statement from the Fed omitted a sentence from its previous statement that “some additional policy firming may be appropriate.” In determining whether additional tightening is necessary, the Fed will consider the lagged impacts of previous rate hikes, as well as economic and financial market conditions, including banking sector stress.
- CBRE expects the Fed will hold rates in the current range of 5.0% to 5.25% before beginning to cut them in Q4.
- Tighter lending conditions and a weakening economy will keep capital markets activity subdued in the near-term and reduce leasing demand.
May Fed Meeting
The Fed raised interest rates by 25 bps today to a target range of 5.00% to 5.25% and indicated that future changes in monetary policy will depend on financial market stability and economic growth, taking into consideration the lagged impact of previous rate increases. Hiking rates just days after the second largest bank failure in U.S. history shows that the Fed remains focused on reducing inflation even if it inflicts additional economic pain.
The Bottom Line
Although the economy has cooled, the strong labor market is complicating the Fed’s inflation fight. Therefore, we expect the Fed will remain determined to see inflation fall to a more acceptable level. While financial markets are expecting a rate cut this summer, we believe the Fed will hold rates steady for several months before beginning to reduce them in Q4. Core inflation should ease as the economy and particularly the housing market cool, ending the year at around 4%. We believe the Fed will continue to cut interest rates throughout 2024.
CBRE expects that capital markets will lead the commercial real estate recovery, with increased investment volume later this year and a rebound in leasing activity thereafter.
Figure 1: CBRE House View
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