September Outlook: Inflation Still ‘Too High,’ Fed Chair Says

Over the past 18 months, the driver of the vehicle that is the U.S. economy has been pumping the brakes. And yet the car keeps accelerating. Despite the Federal Reserve’s most assertive tightening in decades, asset values remain elevated and labor markets are still strong. For real estate investors, these are strange times indeed.


First came the pandemic, which spawned credible fears of a global economic crash. Then came massive stimulus from the Fed, Congress and the White House. By 2021, asset values and consumer prices were soaring. By 2022, inflation had hit the highest levels since the stagflation days of the early 1980s.


With the Fed on the hot seat, Fed Chairman Jerome Powell went to Jackson Hole, Wyoming, for his annual address at the economic symposium hosted by the Federal Reserve Bank of Kansas City. Powell suggested that more rate hikes loom – although he also left the door open to no further action from the Fed.


“It is the Fed's job to bring inflation down to our 2% goal, and we will do so,” Powell said in his Aug. 25 address in Jackson Hole. “We have tightened policy significantly over the past year. Although inflation has moved down from its peak — a welcome development — it remains too high.”


Indeed, the central bank had raised rates a dozen times from early 2022 through July 2023, and inflation has cooled sharply. Even so, the economy’s numerous mixed signals continue to cause confusion among investors and economists.


The investing climate over the past few years has been dizzying. The economy and commercial real estate markets were in growth mode in early 2020. Then the world changed. Trillions of dollars of pandemic stimulus goosed returns, and investors enjoyed outsized returns. Now, though, markets have returned to reality. Crowdvest LLC is a commercial real estate syndication platform that specializes in strategic investments in the industry. In uncertain times, Crowdvest offers cash flow, asset appreciation, tax benefits and investment diversification.

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The inflation picture: Improving, still murky

The COVID pandemic spurred the highest inflation since the early 1980s, and the Fed was caught very much by surprise. Powell initially misread the situation, infamously characterizing rising prices as “transitory.” But by June 2022, the U.S. inflation rate topped 9%. But Powell quickly changed his tune, and from early 2022 through July 2023, the Fed pushed rates from zero to 5.25%.


As of July, the official inflation rate was 3.2%, but Powell said in his Jackson Hole speech that the central bank isn’t ready to stop raising rates. Of course, Powell faces a tricky balancing act – something he acknowledged in his remarks.


“Doing too little could allow above-target inflation to become entrenched and ultimately require monetary policy to wring more persistent inflation from the economy at a high cost to employment,” he said. “Doing too much could also do unnecessary harm to the economy.”

To return to the car analogy, Powell is like a skittish motorist navigating a treacherous surface – he needs to pump the brakes hard enough to slow the momentum, but not so hard that the vehicle spins out of control. Powell twice deployed the phrase “proceed carefully” – an indication that he plans to tap the brake pedal rather than stomp on it.


Observers were left to parse Powell’s remarks, which were crafted carefully enough that he’s not locked into any particular course of action at the next Federal Open Markets Committee Meeting Sept. 20.


“Another rate hike, perhaps even two, cannot be ruled out, although the decision ultimately will depend on the totality of incoming data,” Rubeela Farooqi, chief U.S. economist at High Frequency Economics, told Bloomberg.


While the Fed has made significant progress toward its goal of reining in prices, July’s inflation report was a new wrinkle. The consumer price index (CPI) ticked up to 3.2%, above the 3% result in June.


The relationship between inflation and commercial real estate values is complicated. Inflation creates tailwinds for real estate valuations and can spur higher rents. On the downside, inflation leads to higher interest rates, which means the cost of borrowing to buy property goes up, and higher wages.

Elsewhere in the economy

In a headwind for commercial real estate, work-from-home trends continue to take a toll on the office market. In the second quarter, the average U.S. office lease size was 3,275 square feet, or 19% less than the average lease size between 2015 and 2019, according to commercial real estate data firm CoStar.


More than half of office leases signed before 2020 have yet to expire, The Wall Street Journal reported, and the U.S. office vacancy rate rose from 9.5% before the pandemic to 13.2% now. CoStar expects office vacancies to top 17% by the end of 2026. 


Meanwhile, the Fed’s robust response to inflation since early 2022 signals the end of an era of super-low rates in the U.S. In one illustration of the shift, residential mortgage rates have surged to levels not seen in two decades.

Mortgage giant Freddie Mac reported that mortgage rates averaged 7.31% as of Aug. 24, their highest point since 2001. Notably, it was the Sept. 11 terror attacks in 2001 that ushered in the age of super-low rates. Alan Greenspan, then the chairman of the Federal Reserve, slashed interest rates and then kept them low even as an asset bubble inflated. Greenspan’s post-retirement memoir, published in 2007, offered the surprising admission that he assumed terrorists would strike U.S. soil again. “The Fed’s response to all this uncertainty was to maintain our program of aggressively lowering short-term interest rates,” Greenspan wrote in The Age of Turbulence.


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