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Category: Capital Markets Tags: CPI, Federal Funds Rate, Macroeconomic Market, Unemployment Rate

Macro-Economic Update

In 10 of the last 12 Federal Open Market Committee (FOMC) meetings, the Fed has raised the federal funds rate. This base rate was 0.25 to 0.50 percent at the beginning of 2022 and is now 5.00 to 5.25 percent. However, despite a long string of rate hikes, Fed Chair Jerome Powell announced on June 14th that the Fed has paused rate hikes for now. However, the Fed also suggested that there will likely be two additional rate hikes, with a high likelihood of one in the next meeting.


What will this pause mean for unemployment nationwide, and how will it ultimately impact CRE? Jerome Powell will have all eyes on him for the coming months as the country waits to see how the Fed plans to handle H2 2023.


Federal Funds Rate

A recent statement from the FOMC stated that keeping the rates unchanged will enable the Federal Reserve to evaluate further data and understand its impact on monetary policy. Nevertheless, the FOMC indicated a rate increase may be possible in the next meeting scheduled for July 25-26.


The Committee will consider various factors when determining the measures to achieve a gradual return of two percent inflation. These factors include the overall tightening of monetary policy, the time delays in which monetary policy influences economic activity and inflation, as well as economic and financial developments.


During the press conference, Jerome Powell mentioned that the central bank would take into account the collective effects of previous rate hikes in its upcoming meetings. He clarified that the Fed has not yet reached a decision regarding the policy action for July. According to the CME FedWatch Tool, investors expect a high probability of the Federal Reserve raising rates by 0.25 percent during its next meeting.


Despite the possibility of more rate hikes, Jerome Powell did seem optimistic in the press conference regarding the fight against inflation. He stated, “I would almost say that the conditions that we need to see in place to get inflation down are coming into place.”


As of June 12th, 2023, the effective federal funds rate stands at 5.08 percent, higher the the long-term average of 4.60 percent.


Unemployment Rate vs. Wages

According to the Bureau of Labor Statistics (BLS) May employment report, total nonfarm payroll employment increased by 339,000, and the unemployment rate increased by 0.3 percentage points to 3.7 percent, marking the 29th month of positive job growth. Employment growth was observed in various sectors, including professional and business services, government, healthcare, construction, transportation, warehousing, and social assistance.


An essential gauge of inflation is the average hourly earnings. This rate experienced a 0.3 percent increase for the month, aligning with predictions, according to CNBC. On a yearly basis, wages grew by 4.3 percent, slightly lower than the projected figure by 0.1 percentage points. Additionally, the average workweek decreased by 0.1 hours to reach 34.3 hours.


The U.S. Bureau of Economic Analysis reported that in April 2023, wages in the U.S. saw a growth of 5.58 percent compared to April 2022.


Amidst turmoil encompassing inflation, prominent job cuts, and escalating fuel costs, the labor market in the United States continues to exhibit resilience.


Consumer Price Index Report

The BLS reported that the Consumer Price Index for All Urban Consumers (CPI-U) experienced a 0.1 percent growth on a seasonally adjusted basis in May. This comes after a 0.4 percent increase in April. The primary factor driving the overall monthly increase in the price index was the rise in the shelter category, with the index for used cars and trucks also contributing to the growth. In May, the food index showed a 0.2 percent increase, following two consecutive months of no change. Specifically, the index for food at home saw a 0.1 percent rise, while the index for food away from home increased by 0.5 percent. The energy index experienced a decline of 3.6 percent in May, primarily due to decreases in major energy components.


How is this Impacting CRE?

In an attempt to address the highest inflation levels witnessed in four decades, the central bank has been implementing rate hikes, which have increased financing costs throughout the CRE sector. These rate raises mean the Fed is tightening monetary policy at the fastest rate it has ever done, affecting several other aspects of the economy. Although rate increases are intended to curb inflation, they also raise borrowing costs, negatively affect the stock market, and raise the cost of doing business for both public and private companies.


After 15 months of consecutive increases, this pause may be the relief that several investors have been waiting for. The pause can potentially lighten the load for those struggling with loan repayments for their CRE investments.


Encouragingly, recent federal data indicates that these efforts are yielding positive results, as May’s consumer price index recorded the slowest rate of increase in two years.

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