{"id":1004652673,"date":"2023-03-21T03:35:40","date_gmt":"2023-03-21T11:35:40","guid":{"rendered":"https:\/\/www.commercialsearch.com\/news\/?p=1004652673"},"modified":"2023-04-05T22:32:01","modified_gmt":"2023-04-06T06:32:01","slug":"will-recent-bank-failures-impact-the-next-interest-rate-hike","status":"publish","type":"post","link":"https:\/\/www.commercialsearch.com\/news\/will-recent-bank-failures-impact-the-next-interest-rate-hike\/","title":{"rendered":"Will Recent Bank Failures Impact the Next Interest Rate Hike?"},"content":{"rendered":"
\"Economics<\/a>

Image by mohamed_hassan via Pixabay<\/p><\/div>\n

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<\/strong> and New York-based Signature Bank<\/strong>, respectively.<\/p>\n

Despite being widely seen as isolated incidents, the scale of the failures in the context of the greater economic horizon and the Fed\u2019s 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.<\/p>\n

Widely viewed as non-systemic failures<\/a>, the bank collapses\u2019 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<\/strong>. \u201cMismanaged 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,\u201d Brill explained to Commercial Property Executive<\/em>. \u201cIt\u2019s not a question of bad loans, but panicky people,\u201d Brill added.<\/p>\n

In short, the blame should be distributed. Jason Richards, a partner at Stos Partners<\/strong> contextualized the failure further, seeing compounded, as opposed to raised-in isolation rates as the culprit. \u201cIt 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,\u201d Richards told CPE<\/em>.<\/p>\n

Divided opinions, predictions<\/h2>\n

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.<\/p>\n

Scott Robinson, a clinical associate professor at the NYU Schack Institute of Real Estate<\/strong> and the director of the institution\u2019s 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. \u201c[It\u2019s] an indication that they do not plan on stopping. However, I only anticipate a 25-basis-point hike at the next meeting,\u201d Robinson told CPE. <\/em>Still, Robinson sees the Fed\u2019s more retrospectively motivated, yet equally aggressive rate hikes as potentially problematic; \u201cI would anticipate a lot more known unknowns and unknown unknowns stemming from the long and variable lags of the very aggressive interest rate increases,\u201d Robinson noted.<\/p>\n

\n

READ ALSO: <\/strong>Why the Fed Will Keep Raising Interest Rates<\/a><\/p>\n

\n

Armando Codina, executive chairman at Codina Partners<\/strong> 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<\/a> on part of the Fed and foretelling of things only going downhill and an issue that cannot be solved overnight. \u201cWhen they started raising rates, they did so at a pace we\u2019ve only seen at certain points through history, none of which were bright spots in the economy,\u201d Codina explained. \u201cThe issue is the rapid rise in inflation, but that will certainly not be solved by just continuing to raise interest rates,\u201d Codina said.<\/p>\n

Doubts about necessity<\/h2>\n

Alongside predictions of a possible rate hike, are doubts about one\u2019s 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<\/strong>, opined, \u201cThe Federal Reserve has done a lot already, and year over year inflation has decelerated sharply since its peak. Thus, it\u2019s hard to see the benefit of another quarter-point increase.\u201d Consequently, the question has shifted to not so much if inflation will finally taper off, but when.<\/p>\n

JLL <\/strong>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\u2019 unintended effects including both the bank failures and the losses of millions of jobs. \u201cAt a minimum, it suggests greater caution,\u201d Severino opined to CPE<\/em>. \u201cThe 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,\u201d Severino continued.<\/p>\n

Robinson agrees, and sees current fundamentals, as, in part, out of the control of any regulatory body, and the product of many exogenous factors. \u201cOur 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,\u201d he concluded.<\/p>\n

In the same vein, citing the role that elevated rates played in the isolated failures of the banks, as well as Chairman Powell\u2019s reference to the \u201ctotality of the data\u201d in the Fed\u2019s evaluations, alongside the possibility of \u201chigher and longer\u201d rate hikes in his testimony before Congress, Aaron Jodka, Director of U.S. Research for U.S. Capital Markets at Colliers<\/strong> offered some additional sanguinity; \u201cGiven the recent bank failures, it is quite possible that the Fed takes a more dovish stance at this week\u2019s meeting than it otherwise might have.\u201d<\/p>\n

Industry adapts<\/h2>\n

Despite what the Fed\u2019s 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. \u201cMarket participants have been expecting rate increases for some time, so the Fed\u2019s decision this week will not likely have a material effect on investment sales activity,\u201d Jodka detailed.<\/p>\n

In that same vein, the office sector is likely to suffer, given both a volatile lending environment and the class\u2019s uncertain future<\/a>. \u201cThe 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,\u201d Richards detailed.<\/p>\n

On the flipside, factors such as increased industry onshoring, are likely to alleviate supply chain slowdowns and their associated inflationary burdens. \u201c[These} are structural elements that are working in favor of controlling inflation,\u201d Brill said.<\/p>\n

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. \u201cThere 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?\u201d he asked.<\/p>\n","protected":false},"excerpt":{"rendered":"

The Fed’s quest to reduce inflation at any cost has produced some unintended consequences. <\/p>\n","protected":false},"author":3012,"featured_media":1004652674,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[44033,21808,21825,22251,23891,21742,21747,51037],"tags":[35498,37358,37237,32796,51573,42251,51705,34862],"class_list":["post-1004652673","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-executive-profiles","category-featured","category-finance","category-in-focus","category-national","category-latest","category-office","category-trends","tag-colliers","tag-crow-holdings","tag-fti-consulting","tag-jll","tag-nyu-schack","tag-signature-bank","tag-silicon-valley-bank","tag-stos-partners"],"acf":[],"yoast_head":"\nWill Recent Bank Failures Impact the Next Interest Rate Hike? - Commercial Property Executive<\/title>\n<meta name=\"description\" content=\"Industry experts discuss a possible interest rate hike in the face of the recent bank failures, and what they mean for CRE.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.commercialsearch.com\/news\/will-recent-bank-failures-impact-the-next-interest-rate-hike\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Will Recent Bank Failures Impact the Next Interest Rate Hike?\" \/>\n<meta property=\"og:description\" content=\"Industry experts discuss a possible interest rate hike in the face of the recent bank failures, and what they mean for CRE.\" \/>\n<meta property=\"og:url\" content=\"https:\/\/www.commercialsearch.com\/news\/will-recent-bank-failures-impact-the-next-interest-rate-hike\/\" \/>\n<meta property=\"og:site_name\" content=\"Commercial Property Executive\" \/>\n<meta property=\"article:publisher\" content=\"https:\/\/www.facebook.com\/CPExecutive\" \/>\n<meta property=\"article:published_time\" content=\"2023-03-21T11:35:40+00:00\" \/>\n<meta property=\"article:modified_time\" content=\"2023-04-06T06:32:01+00:00\" \/>\n<meta property=\"og:image\" content=\"https:\/\/www.commercialsearch.com\/news\/wp-content\/uploads\/sites\/46\/2023\/03\/capital-3205562_1920.jpg\" \/>\n\t<meta property=\"og:image:width\" content=\"1200\" \/>\n\t<meta property=\"og:image:height\" content=\"912\" \/>\n\t<meta property=\"og:image:type\" content=\"image\/jpeg\" \/>\n<meta name=\"author\" content=\"Gabriel Frank\" \/>\n<meta name=\"twitter:card\" content=\"summary_large_image\" \/>\n<meta name=\"twitter:creator\" content=\"@cpexecutive\" \/>\n<meta name=\"twitter:site\" content=\"@cpexecutive\" \/>\n<script type=\"application\/ld+json\" class=\"yoast-schema-graph\">{\"@context\":\"https:\/\/schema.org\",\"@graph\":[{\"@type\":\"WebPage\",\"@id\":\"https:\/\/www.commercialsearch.com\/news\/will-recent-bank-failures-impact-the-next-interest-rate-hike\/\",\"url\":\"https:\/\/www.commercialsearch.com\/news\/will-recent-bank-failures-impact-the-next-interest-rate-hike\/\",\"name\":\"Will Recent Bank Failures Impact the Next Interest Rate Hike? 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