CAPITAL AND CREDIT - July 20, 2018 - Roundtable Weekly

Fed Chairman Testifies to Congress on Interest Rates; Banks Concerned About CRE Lending Risk  

In testimony before Congress this week, Federal Reserve Chairman Jerome Powell testified about interest rates and monetary policy.  “With a strong job market, inflation close to our objective, and the risks to the outlook roughly balanced, the FOMC believes that – for now – the best way forward is to keep gradually raising the federal funds rate,” Powell told the Senate Banking Committee on Tuesday

  Jerome Powell_SBCTestimony

In testimony before Congress this week, Federal Reserve Chairman Jerome Powell testified about interest rates and monetary policy.

  • After the Fed raised short-term U.S. rates twice in the first half of 2018, it is expected to issue two more increases this year, starting in September.  (MarketWatch, July 17 and Wall Street Journal, July 19)
  • In Chairman Powell's Senate testimony, he said the Fed expects, with appropriate monetary policy, that the job market will remain strong and inflation will stay near two percent over the next several years.  He added that the Fed’s economic forecast faces the uncertain impact of trade policies and tax legislation. “It is difficult to predict the ultimate outcome of current discussions over trade policy as well as the size and timing of the economic effects of the recent changes in fiscal policy,” Powell testified.  
  • The Fed yesterday released its "Beige Book" of current economic conditions, which notes the effects of newly-imposed tariffs: “Manufacturers in all Districts expressed concern about tariffs and in many Districts reported higher prices and supply disruptions that they attributed to the new trade policies. Tariffs contributed to the increases for metals and lumber.” According to the report’s national summary commercial real estate markets show stable or improving growth.  (Reuters, July 18 and GlobeSt, July 19)   
  • During the House Financial Services Committee on Wednesday, Powell also commented on CRE asset pricing.  “Broadly speaking, commercial real estate prices are in the upper range, I think, generally elevated. I wouldn't use the bubble word here, but I would say that many financial asset prices are elevated above their normal ranges.”
  • According to a July 16 Financial Times article, U.S. banks are increasingly concerned about the effects of rising interest rates on CRE lending, with executives saying they are worried about an overheated market.  “US bankers have warned about mounting risks in commercial real estate, with figures showing they are putting the brakes on loans to buyers of office buildings, hotels and shopping malls,” the Times reports. 

The effects of monetary policy and tax legislation on commercial real estate will be a focus of The Roundtable’s September 26 Fall Meeting in Washington, DC.

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