Will Recent Bank Failures Impact the Next Interest Rate Hike?

The Fed's quest to reduce inflation at any cost has produced some unintended consequences.

Economics picture

Image by mohamed_hassan via Pixabay

Ahead of a March 22 meeting of the Federal Reserve, the U.S. experienced its second- and third-largest bank failures in history, with the collapse of Silicon Valley Bank and New York-based Signature Bank, respectively.

Despite being widely seen as isolated incidents, the scale of the failures in the context of the greater economic horizon and the Fed’s coming meeting, has some in the commercial real estate industry both expressing concern about the increases as exacerbating these problems, alongside contributing to further volatility in the market.

Widely viewed as non-systemic failures, the bank collapses’ were certainly caused by economic fundamentals shaped by the Fed that laid bare irresponsible management practices, according to Glenn Brill, managing director of Real Estate Advisory Services at FTI Consulting. “Mismanaged banks are going to fail regardless. Rising interest rates had an impact on recent failures, but those banks and their risk management policies and cash reserves are up to management,” Brill explained to Commercial Property Executive. “It’s not a question of bad loans, but panicky people,” Brill added.

In short, the blame should be distributed. Jason Richards, a partner at Stos Partners contextualized the failure further, seeing compounded, as opposed to raised-in isolation rates as the culprit. “It is not 25 or 50 basis point rate hikes that trigger the bank failures but rather the over 400 basis point increases over the last 12 months that contributed to their balance sheet issues,” Richards told CPE.

Divided opinions, predictions

For certain, the Fed has taken the bank failures, and their associations with elevated interest rates into account, but, as seen by some in the industry, it is not likely to pause on raising the interest rate. Despite the failures, the primary goal, weighed alongside other responsibilities, appears to be to reduce inflation, the highest in four decades, to 2 percent, no matter the cost.

Scott Robinson, a clinical associate professor at the NYU Schack Institute of Real Estate and the director of the institution’s REIT Center sees a hike as being probable particularly following the announcement of the Bank Term Funding Program, to protect the deposits of clients following the collapse. “[It’s] an indication that they do not plan on stopping. However, I only anticipate a 25-basis-point hike at the next meeting,” Robinson told CPE. Still, Robinson sees the Fed’s more retrospectively motivated, yet equally aggressive rate hikes as potentially problematic; “I would anticipate a lot more known unknowns and unknown unknowns stemming from the long and variable lags of the very aggressive interest rate increases,” Robinson noted.

READ ALSO: Why the Fed Will Keep Raising Interest Rates

Armando Codina, executive chairman at Codina Partners likewise anticipates a rate hike, but sees it as the most optimal of only unideal options, stemming in part due to what he perceives to be delayed action on part of the Fed and foretelling of things only going downhill and an issue that cannot be solved overnight. “When they started raising rates, they did so at a pace we’ve only seen at certain points through history, none of which were bright spots in the economy,” Codina explained. “The issue is the rapid rise in inflation, but that will certainly not be solved by just continuing to raise interest rates,” Codina said.

Doubts about necessity

Alongside predictions of a possible rate hike, are doubts about one’s actual necessity. Such views stem from inflation slowing drastically from its peak of 9.1 percent in June of 2022, as well as recent testimony on part of Federal Reserve Chairman Jerome Powell. Citing such data, as well as the role of previous interest rate hikes in alleviating it down to where it currently stands, Mark Roberts, director of Research at Crow Holdings, opined, “The Federal Reserve has done a lot already, and year over year inflation has decelerated sharply since its peak. Thus, it’s hard to see the benefit of another quarter-point increase.” Consequently, the question has shifted to not so much if inflation will finally taper off, but when.

JLL Chief Economist Ryan Severino believes that the Fed is, to some extent, aware of this, with a job made all the more difficult by a newfound need to balance inflation with market financial stability, two goals whose methods of achievement can often be at odds with each other. This possible caution has been amplified by previous rate hikes’ unintended effects including both the bank failures and the losses of millions of jobs. “At a minimum, it suggests greater caution,” Severino opined to CPE. “The Fed itself likely realizes that the calculus is different now. In the short term, it likely means a less aggressive pace of hiking because price stability now risks both full employment and financial stability. Sacrificing both of those while inflation is already decelerating could be a bridge too far,” Severino continued.

Robinson agrees, and sees current fundamentals, as, in part, out of the control of any regulatory body, and the product of many exogenous factors. “Our recent episode of inflation has been driven by a volatile mix of too much monetary stimulus and numerous supply-side issues, such as production shortfalls, distribution and supply-chain hiccups [as well as] decreased labor participation rates. For all these reasons, price levels could remain somewhat elevated regardless of the level of interest rates,” he concluded.

In the same vein, citing the role that elevated rates played in the isolated failures of the banks, as well as Chairman Powell’s reference to the “totality of the data” in the Fed’s evaluations, alongside the possibility of “higher and longer” rate hikes in his testimony before Congress, Aaron Jodka, Director of U.S. Research for U.S. Capital Markets at Colliers offered some additional sanguinity; “Given the recent bank failures, it is quite possible that the Fed takes a more dovish stance at this week’s meeting than it otherwise might have.”

Industry adapts

Despite what the Fed’s decision ends up being, many constants are likely to remain, particularly where individual commercial real estate sectors are concerned. From lending volatility to a dearth of debt, the attitude in the industry has largely shifted more toward mitigation. “Market participants have been expecting rate increases for some time, so the Fed’s decision this week will not likely have a material effect on investment sales activity,” Jodka detailed.

In that same vein, the office sector is likely to suffer, given both a volatile lending environment and the class’s uncertain future. “The asset category that is most vulnerable is office as it is already struggling with significant challenges from the pandemic and there is worry that the current issues are making recovery even more difficult and uncertain,” Richards detailed.

On the flipside, factors such as increased industry onshoring, are likely to alleviate supply chain slowdowns and their associated inflationary burdens. “[These} are structural elements that are working in favor of controlling inflation,” Brill said.

Whatever the decision may be, one viable solution could simply be patience, particularly amid already decelerating inflation. Severino sees this as a near requirement to reach the coveted 2 percent inflation rate. “There are no hard rules around timeframe. The global supply chain needs more time to fully heal, the pandemic stimulus is still unwinding, and the world is still adjusting to higher interest rates. Do we have the ability and discipline to ride this out, or do we need to get inflation down as soon as possible, even it means a lot of collateral damage?” he asked.

You May Also Like