How Rate Hikes Could Affect CRE

Much rides on the timing and size of an interest rate increase by the central bank.

Long ago, Romans watched birds in the sky or inspected the innards of sacrificed animals for favorable or unfavorable auspices about the future. These days, economists, investors and financial journalists pick through the words of the Federal Reserve, and the Fed chair, for hints about the future. Much rides on the timing and size of an interest rate increase by the central bank—and that’s certainly the case for commercial real estate, for which debt financing is so important. So the Fed goes out of its way to be opaque about its actions, but also tries not to rattle investors.

On Wednesday, Fed watchers were watching carefully, one of the main questions being whether the Federal Open Market Committee would cast out the word “patient” from the minutes of its meeting in January. As in, the Fed can be “patient” in its timing of higher interest rates. As it turned out, the FOMC minutes did indeed lose the term “patient,” but also were at pains to stress that the absence of that single word didn’t mean that the central bank is now itching impatiently to kick rates upstairs. Just the opposite, in fact, and so the markets took things calmly, all in all. In fact, investors were in a buying mood, driving stocks upward, since cheap money is good for the part of the economy that tends to speculate on the equities markets.

The Fed was unusually clear about the next meeting. “The Committee judges that an increase in the target range for the federal funds rate remains unlikely at the April FOMC meeting,” the minutes said. “The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term.”

Which means not yet for a rate hike, because the economy’s sputtering again (just a little). In its minutes, the FOMC revised its projections for US GDP growth for 2015 downward; revised the projected unemployment rate down again; and also revised inflation projections down, including core inflation. The Fed now expects GDP to grow 2.3 percent to 2.7 in 2015, instead of the 2.6 percent to 3 percent it predicted in December. It’s also predicting that unemployment will be at 5 percent to 5.2 percent, rather than 5.2 percent to 5.3 percent. And what about inflation? The Fed thinks it will be only 0.6 percent to 0.8 percent this year, a mere shadow of the beast it was 40 years ago, and weak even when compared to the central bank’s target goal of 2 percent. By implication, these weaker projections are reasons that the Fed will still be patient when it comes to a rate hike, even if it doesn’t use that work anymore.