Here are the Minutes of the Federal Open Market Committee May 2–3, 2023, emphasis mine.
Key Paragraphs
Market participants broadly expected a 25 basis point rate increase at the May meeting and saw the resulting rate as the likely peak for the current tightening cycle. Survey respondents assigned a much higher probability to the peak federal funds rate being between 5 and 5.25 percent than they did in March. However, respondents still assigned a substantial probability that the peak rate may turn out to be above 5.25 percent. Respondents expected the peak rate to be maintained through the January 2024 FOMC meeting.
Although CRE [Commercial Real Estate] loan growth on banks’ balance sheets remained robust in the first quarter, the April SLOOS [Senior Loan Officer Opinion Survey on Bank Lending] indicated that loan standards across all CRE loan categories tightened further in the first quarter. The reported tightening in standards over the first quarter was particularly widespread for mid-sized banks. Banks also reported that they expected to tighten CRE standards further over the remainder of the year, with mid-sized banks very broadly reporting this expectation. Meanwhile, commercial mortgage-backed securities (CMBS) issuance was very slow in February and March, amid higher spreads and volatility as well as tighter lending standards.
Overall, the credit quality of most businesses and households remained solid but deteriorated somewhat for businesses with lower credit ratings and for households with lower credit scores. The credit quality of C&I and CRE loans on banks’ balance sheets remained sound as of the end of the fourth quarter of last year. However, in the April SLOOS, banks frequently cited concerns about a deterioration in the quality of their loan portfolios as a reason for expecting to tighten standards over the remainder of the year.
Valuations in both residential and commercial property markets remained elevated. Rising borrowing costs had contributed to a moderation of price pressures in housing markets, and year-over-year house price increases had decelerated. The staff noted that the CRE sector remained vulnerable to large price declines. This possibility seemed particularly salient for office and downtown retail properties given the shift toward telework in many industries.
The staff also noted analysis that found that while losses to CRE debt holders could be moderate in aggregate, some banks and the CMBS market could experience stress should prices of these properties decline significantly.
Participants agreed that inflation was unacceptably high. They commented that data through March indicated that declines in inflation, particularly for measures of core inflation, had been slower than they had expected.
Participants noted that risks associated with the recent banking stress had led them to raise their already high assessment of uncertainty around their economic outlooks. Participants judged that risks to the outlook for economic activity were weighted to the downside, although a few noted the risks were two sided.
Six Key Points
- Higher for longer, the Fed thinks it will hold the terminal rate constant all the way through January of 2024.
- CRE loan growth slow, SLOOS shows concerns about a deterioration in the quality of loan portfolios. The CMBS market could experience stress should prices of these properties decline significantly.
- Valuations in both residential and commercial property markets remained elevated.
- Inflation was unacceptably high. Declines in inflation, particularly for measures of core inflation, slower than they had expected.
- Banking stress increases the already high assessment of uncertainty.
- Outlook for economic activity were weighted to the downside.
Regarding Commercial Real Estate
The market still has a rate cut earmarked for December despite these minutes. Someone is wrong.
I will update the market’s perceived odds at the end of he day or early tomorrow.
This post originated on MishTalk.Com.
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Mish
measures of core inflation, slower than they had expected.”
Wake up and smell
the coffee. The complete deregulation of interest rates was a ruse perpetrated
by the ABA.
The DIDMCA was a
monumental mistake. It caused the Savings and Loan Association crisis (as
predicted in May 1980) and the July 1990-Mar 1991 recession.
WSJ: “In a
letter of March 15, 1981, Willis Alexander of the American Bankers Association
claims that: ‘Depository Institutions have lost an estimated $100b in potential
consumer deposits alone to the unregulated money market mutual funds.’ As any
unbiased banker should know, all the money taken in by the money funds goes
right back into the banks, in the form of CDs or bankers acceptances or other
money market instruments; there is no net loss of deposits to the banking
system. Complete deregulation of interest rates would simply allow a further
escalation of rates by the banks, all of which compete against each other for
the same total of deposits.”
Written by Louis
Stone whom the movie “Wall Street” was dedicated to – Vice President
Shearson/American Express
precise “Minskey Moment” of the GFC:
Oct 2006, & up a huge 6.3% from Nov 2006.
disposal of the monetary authority in a free capitalistic system through which
the volume of money can be properly controlled is legal reserves. The FED will
obviously, some time in the future, lose control of the money stock.
restrictive and we face uncertainty about the lagged effects of our tightening
so far and about the extent of credit tightening from recent banking stresses,”
Powell told a Fed conference Friday in Washington.
The effect of the FED’s
operations on interest rates (now largely via the remuneration rate), is
indirect, varies widely over time, and in magnitude. What the net expansion of
money will be, as a consequence of a given injection of additional reserves, nobody
knows until long after the fact.
The consequence is a delayed,
remote, and approximate control over the lending and money-creating capacity of
the payment’s system.
You drain reserves (like Bernanke did), while lowering the O/N RRP award rate, and gradually drive the banks out of the savings
business (which doesn’t reduce the size of the payment’s system). Interest is the price of credit. The price of money is the reciprocal of the price level.
Lending/investing by the DFIs expands both the volume and the
velocity of new money. Lending by the NBFIs increases the turnover of existing
deposits (a transfer of ownership), within the commercial banking system.
Nice prediction. Now, how are you investing to take advantage?