Fed Consistent with Plan to Battle Inflation

At the Federal Open Market Committee’s fifth meeting of the year, policymakers voted to raise the federal funds rate by 75 basis points to a target range of 2.25% to 2.5%, as they continue to battle inflation, which rose to 9.1% in June, the largest 12-month increase in over 40 years. The July announcement follows rate increases of 75 basis points in June, 50 basis points in May and 25 basis points in March. Policymakers continue to execute an aggressive monetary policy as they strive to achieve the Fed’s goal of reducing inflation to 2%.

“While another unusually large increase could be appropriate at our next meeting (in September), that is a decision that will depend on the data we get between now and then,” Federal Reserve Chairman Jerome Powell said. “We will continue to make our decisions meeting by meeting and communicate our thinking as clearly as possible. As the stance of monetary policy tightens further, it likely will become appropriate to slow the pace of increases while we assess how our cumulative policy adjustments are affecting the economy and inflation.”

Chairman Powell said that the FOMC will update its Summary of Economic Projections (SEP) before the September meeting as a guide for future actions. In the meantime, the Fed will continue operating under the June SEP which projected the federal funds rate would rise to 3.4% at the end of this year, 3.8% at the end of next year and 3.4% in 2024.

The day after the Fed’s rate announcement, the Commerce Department reported that real gross domestic product (GDP) decreased at an annual rate of 0.9 percent in the second quarter of 2022, following a first quarter decline of 1.6 percent. A recession is defined by some economists as two consecutive quarters of declining GDP.

During Wednesday’s press conference following his formal announcement, Chairman Powell responded to several questions about the likelihood of a recession, “I don’t think the U.S. is currently in a recession because many areas of the economy are doing well.”

“The good news is there is still a lot of capital in the market and banks nationwide are lending,” said Matthew Dzbanek, Senior Director in Capital Services at Ariel Property Advisors. “We’re seeing continued positive momentum for borrowers in the commercial real estate sector.”

Location and the asset type make a difference in today’s environment, Dzbanek noted. While lenders are still putting out loans, they are being selective about the sponsor, what they are lending on and where. For instance, lenders are still financing mixed-use properties in residential neighborhoods throughout New York City because local services such as liquor stores, dry cleaners, barber shops and restaurants are seen as “Amazon proof.''

However, Dzbanek cautioned that borrowers should expect lower loan proceeds due to rate increases because lenders want to ensure that a property’s cash flow is sufficient to service the debt.

“In this new environment, our team is actively introducing our clients to new equity partners and, for clients interested in selling, to a professional in Ariel’s Investment Sales Division,” Dzbanek said.

With rising interest rates, borrowers and lenders are adjusting to the new normal in which capital remains available but the terms have changed, making it even more important for borrowers to run a process to discover the best financing option.