Podcasts Business Investing Real Estate News: Real Estate Investing Podcast Fed Hikes Rates Despite Bank Turmoil

Fed Hikes Rates Despite Bank Turmoil

Published: March 24, 2023, 2:21 a.m.

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The Fed followed through on another rate hike despite the banking turmoil. Members of the Federal Open Market Committee raised the Federal Funds rate another quarter point on March 22nd. That brings the short term rate to a range of 4.75% to 5%.\\xa0
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Hi, I\'m Kathy Fettke and this is Real Estate News for Investors. Please remember to subscribe to this podcast and leave us a review.
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Fed Chief Jerome Powell said the collapse of two banks, and the near-collapse of a third, did force Fed officials to consider a pause in rate hikes. But he says they were persuaded to hike rates again because of stubbornly high inflation and a strong job market with strong wage growth. But Powell offered assurances that the central bank is prepared to protect the banking system. He also still believes there\\u2019s a path to a soft landing. (1)
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Powell says he expects the need for one more rate hike this year, while seven of the 18 Fed officials are forecasting two hikes. If the short-term rate is raised another quarter point, the end range would be 5% to 5.25%.\\xa0
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Fed Sees Higher End-of-the-Year PCE Percentage
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The Fed previously thought Personal Consumption Expenditure index, or PCE, would end the year at 3.1%. It\\u2019s now projecting a higher 3.3%, which is moving in the wrong direction from the central bank\\u2019s 2% target.\\xa0
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In the meantime, the Fed also needs to make sure the financial system remains stable. There\\u2019s fear that nervous depositors could pull more money out of regional banks, which are already under stress. Federal regulators took control of Silicon Valley Bank and Signature Bank, and are making sure depositors get all their money back despite the FDIC limit of $250,000. The Fed also worked with the FDIC, and the U.S. Treasury in the creation of a fund for banks that need to borrow money to cover deposits. As reported by Bisnow, banks withdrew a total of $300 billion during the first week.
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Government Prepared to Prop Up Small Banks
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Treasury Secretary Janet Yellen also says the government is prepared to protect small banks from failures, but much of this stability depends on the confidence of depositors. Archie brown of Cincinnati-based First Financial Bank told Bisnow: \\u201cThe main thing is to make sure that the Fed is instilling confidence in the deposit base. As long as we do that, I think everything else will manage itself.\\u201d
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The San Francisco-based First Republic had teetered toward failure with a $70 billion run on deposits, which is about half of its total. The bank received an infusion of cash from eleven large banks and the federal government to keep it from toppling. But the experts are still worried about smaller regional banks which is where a lot of commercial real estate investors get their loans. According to an article in Axios, small and mid-sized banks hold 67% of commercial real estate loans, and 37% of residential real estate loans. (3)
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Small Banks Could Reduce Real Estate Exposure
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Brad Kraus of the CRE financial consulting first Ascension said in an email to Bisnow: \\u201cIf banks do end up struggling, the first thing we see here on the front lines is a reduction in their real estate exposure.\\u201d He said: \\u201cIf things get worse, they simply start quoting rates which guarantee profitability, thus effectively pricing themselves out of the market.\\u201d (4)
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Higher rates will push commercial real estate values lower. Keiran says: \\u201cThose looking to sell anytime soon, especially those owners that are facing loan maturities, will have to offer their deals at higher cap rates to attract buyers.\\u201d According to the Wall Street Journal, as much as $270 billion in commercial mortgages will mature this year.\\xa0
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As these loans mature Keiran expects to see a \\u201cmajor value adjustment\\u201d for commercial properties especially if we sink into a recession. Banks are also likely to cut back on lending as a way to preserve capital, especially if they expect the Fed to keep hiking rates.
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That\\u2019s it for now. You\\u2019ll find links in the show notes at newsforinvestors.com Please remember to join RealWealth. It\\u2019s free to join and gives you an all-area pass to our website. That includes our investor portal, our market data, and our experienced investment counselors. You can also find out more about our mastermind events, and our real estate tours in markets that are popular among single-family rental investors.
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Thanks for listening,
Kathy


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