Fed Funds Rate Ticks Up Again. More Hikes Likely, Chair Powell Says.

The Federal Reserve today announced another hike in interest rates—raising the federal funds rate by another 50 basis points. It’s the seventh consecutive increase this year aimed at cooling inflation by dampening the economy. With today’s increase, the Fed escalated the federal funds target rate to a 15-year high, with a targeted range between 4.25 percent and 4.5 percent, up from near-zero levels in March.

The 50 basis point rise represents a more moderate increase than the Fed’s previous four aggressive hikes of 75 bps.

Fed Chair Jerome H. Powell indicated that rate hikes are likely to keep coming. The questions remain: how high can they go, and for how much longer? The central bank has indicated it expects to raise its “terminal rate” to 5.1 percent before the hiking cycle concludes in 2023. Chair Powell repeatedly stated that the central bank is committed to returning inflation to 2 percent, the rate last seen in the three years before the COVID pandemic. Inflation, however, remains elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures.

“The full effects of our rapid tightening so far are yet to be felt,” Chair Powell said. “Even so, we have more work to do.”

With the fed fund rate now the highest it has been in nearly 40 years, increased input costs and expectations for a cooling economy, businesses are dealing with mounting headwinds. In particular, lenders and borrowers are facing significant challenges going into 2023 that will likely result in an increase in troubled loan transactions requiring restructuring or more drastic measures.

As rates continue to trend up, it will become more expensive to refinance debt that matures and more expensive to otherwise access capital – capital that may likely be less available in 2023 than in recent years. Overall, company and property values are expected to be adversely affected compounding the problems further. This is especially true in the office building sector where tenants continue to reduce their space needs. Meanwhile, rental rate growth in the multi-family sector has slowed considerably from 2021 and early 2022 growth rates.

Progress Made, But More Needed on Inflation

The hikes appear to be having some effect. On Tuesday, the Labor Department issued new CPI data. Inflation, which peaked at 9.1 percent in June, was lower last month than expected, easing to about 7.1 percent in November—the lowest it’s been in more than a year. The yield on two-year U.S. Treasuries surged this afternoon after the Fed’s announcement.

The unemployment rate on the last day of November was 3.7 percent, essentially unchanged, the U.S. Bureau of Labor Statistics reported on December 1. “Demand substantially exceed[s] the supply of available workers,” Chair Powell said. The number of job openings edged down to 10.3 million on the last business day of October, according to the Department of Labor. “The labor market is very, very strong,” Chair Powell said. “Companies are very reluctant to lay people off. With the exception of tech, companies want to hold on to their workers."

Ballard Spahr's multidisciplinary Distressed Assets and Opportunities team is ready to meet clients where they are and assist clients through the turbulence of a macroeconomy where the cost of capital is likely to continue to increase during the foreseeable future, and its availability may become further constrained, creating both challenges and opportunities. Please contact us if you have questions or would like to learn more about our team.

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