Intelligent Investment

Economic Watch: Fed Pauses Rate Hikes but Remains Open to Further Tightening

June 15, 2023 3 Minute Read

Executive Summary

  • The Federal Reserve held the federal funds rate at a range of 5.00% to 5.25%, ending a cycle of 10 consecutive rate hikes totaling 5 percentage points since March 2022.
  • However, the Fed indicated that it may raise rates two more times this year if core inflation remains elevated.
  • Compared with its earlier outlook, the Fed now expects stronger GDP growth for 2023 (1.0% vs 0.4% previously) and lower unemployment (4.1% vs. 4.5%), lower headline inflation (PCE 3.2% vs. 3.3%) and higher core inflation (3.9% vs. 3.6%) at year end.
  • Tighter lending conditions and a weakening economy will keep capital markets activity subdued and reduce leasing demand until late this year.

June Fed Meeting

The Fed held interest rates at a range of 5.00% to 5.25% and indicated that future changes in monetary policy will be assessed based on financial market stability and economic growth, taking into consideration the lagged impact of previous rate hikes. The decision came on the heels of yesterday’s Consumer Price Index report, which showed the headline inflation rate at a two-year low of 4%.

The Bottom Line

Although the economy is beginning to cool, a strong labor market and persistently high core inflation (5.3% in May) are complicating the Fed’s policy decisions. We expect that a slower economy and the impact of previous rate hikes will soften the labor market and lower core inflation over the next six to 12 months. So, there is still a reasonable chance that interest rates have peaked. However, if core inflation does not trend down in the near term, the Fed likely will raise rates one or two more times. If these hikes do occur, we think they will be relatively short term and that pressure will build to lower rates by the end of the year.

Capital markets activity will remain depressed until there is clear evidence that we have passed through the peak of the interest rate cycle. CBRE still expects this will occur by year-end but there is now a greater likelihood that it may be delayed until 2024.

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