Intelligent Investment

Economic Watch: First Fed Rate Hike Since 2018

March 16, 2022 3 Minute Read

Executive Summary

  • In response to elevated inflation levels, the Federal Reserve raised the federal funds rate by 25 basis points (bps) today to a target range of 0.25% to 0.50%. This was the first rate increase since 2018.
  • The Fed also announced today that it will begin reducing its nearly $9 trillion balance sheet later this year.
  • The Fed’s inflation outlook was raised to 4.1% (Core PCE, which excludes food and energy prices) from 2.7% and its GDP growth forecast was lowered to 2.8% from 4.0%.
  • With a strong labor market, the Fed has shifted its focus to price stability.
  • Amid continued economic growth and high inflation, CBRE forecasts five additional 25-bp increases this year to a target range of 1.50% to 1.75%. However, the Fed indicated today that it plans six more rate increases this year to a range of 1.75% to 2.0%.
  • CBRE continues to expect healthy real estate fundamentals and investment volumes in 2022.

The March FOMC Meeting

The Federal Reserve raised interest rates by a quarter-point today to a target range of 0.25% to 0.50%. This rate increase was expected, given the strong labor market, high inflation and above-trend economic growth expectations for 2022.

Additionally, the Fed ended its asset purchase program (quantitative easing) earlier this month, as it begins to wind down pandemic relief measures. The Fed also announced it will no longer replace securities on its balance sheet as they mature, beginning later this year.

The Fed also revised its economic forecasts for the year. Its forecast for GDP growth was lowered to 2.8% from 4.0%, while its expectation for inflation (Core PCE) was raised to 4.1% from 2.7% annualized.

CBRE Economic Forecast

Persistently high inflation over the past year is now being exacerbated by repercussions of Russia’s invasion of Ukraine. This is particularly evident with oil prices, which have reached levels not seen since 2014. Notably, prices have fallen well below their recent highs amid optimism that geopolitical tensions may ease and concerns that a spike in COVID infections in Asia could reduce demand for oil.

On the supply side, the U.S. and Europe are trying to persuade OPEC to increase oil production. Additionally, oil output from Iran could rise in the near-term if international negotiators can cement an agreement over its nuclear program. Longer term, increased U.S. production should also help limit price increases, barring any significant disruptions to Russian oil supplies. As a result, while we expect inflationary pressure from energy prices to persist, we do not foresee them worsening significantly at this time.

There will be a delicate balancing act over the coming months as the Fed attempts to tame inflation at a time of heightened geopolitical tensions. CBRE expects five additional 25-bp rate increases this year to a target range of 1.5% to 1.75%. This is in line with interest rate levels prior to the pandemic. The median Fed forecast expects six additional 25-bp hikes in 2022 to a range of 1.75% to 2.0%. Should inflation continue to rise sharply in April and the economic outlook remain solid, the Fed could raise rates by 50 bps at its next meeting in early May.

Even with these expected increases, interest rates will remain relatively low (negative in real terms after accounting for inflation), which is positive for the commercial real estate market. Additionally, CBRE forecasts 3.5% GDP growth in 2022, which is above the Fed’s newly updated forecast of 2.8%.

The Bottom Line

CBRE continues to expect a strong year for real estate in 2022. This view is underpinned by expectations of economic growth well above the long-term trend of 2% and negative real interest rates. This will support both healthy commercial real estate fundamentals and investment volume likely on par with last year, despite heightened uncertainty.

Figure 1: CBRE House View

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