Fed Indicates that “Peak Dovishness” Is Over

Today’s Federal Reserve meeting, statement and presser from Fed Chair Powell definitely showed the central bank starting to pivot away from the ultra-accommodative policies put in place last year The headline: 13 of the 18 Fed voting members believe the Fed will raise rates in 2023 (this number was 7 of 18 in March 2021), with 7 of them now predicting a 2022 rate increase (up from 4 in March 2021). Inflation hawkishness has been abundant in recent weeks. Statements from Lawrence Summers, Deutsche Bank, various CNBC commentators have accused the Fed of being overly sanguine in policy and rhetoric. Powell acknowledged this atmosphere: “inflation could turn out to be higher and more persistent than we anticipate”. He also prepared the markets for a decrease in monthly bond purchases (now $120 billion per month) by saying “this meeting, is the ‘talking about talking about’ meeting” which referenced his promise to telegraph any decreases in Fed bond buying in advance. Today the telegram was sent! Bond buying will taper probably by year end. This matters to commercial real estate because the Fed is affecting both the index (treasuries) and the spreads (Fannie/Freddie bonds) with these purchases. As these purchases slow, the private sector would have to make up the slack to keep rates low. Also, the Fed increased their headline inflation expectation to 3.4% (up a full point from March 2021). Powell sought to calm markets near the end of the presser. Perhaps he was watching the Dow crash 400 points on a CNBC monitor in the room? Again, he used the “t word” (Transitory) to describe inflation. As far as the projections for upcoming rate increases, he reminded everyone they are projections and should be taken with a “big grain of salt”. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners