In a continued effort to reduce inflation to its 2 percent target, the Federal Reserve on Wednesday raised the benchmark interest rate another quarter-point, setting it between 5 and 5.25 percent, a 16-year high.
At the Federal Reserve’s post-meeting press conference, Federal Reserve Chair Jerome Powell was careful to state that the Federal Open Market Committee (FOMC) had not yet made a decision to “pause” its campaign to slow the growth of inflation by increasing interest rates.
“The labor market remains very tight,” he noted.
The Federal Reserve’s post-meeting statement did, however, notably not include a comment contained in its March statement that the central bank “anticipates that some additional policy firming may be appropriate” for the Fed to achieve its 2 percent inflation goal.
The FOMC “will be driven by incoming data, meeting by meeting,” Chair Powell said.
This latest announcement marks the tenth consecutive increase by the Federal Reserve; that’s the highest number of consecutive rate hikes on record. The campaign to get inflation under control by raising interest rates over the last 13 months has taken its toll on the economy, dampening markets and forcing companies, consumers, and investors to grapple with higher borrowing costs.
Corporate debt defaults reached the highest they have been since 2009, and many experts predict that, by the end of the year, loan default rates will rise to more than 4 percent—double where they are now, providing an opportunity to acquire distressed assets at bargain prices. Sectors with higher-than-average default rates include retail, telecommunications, broadcast and media, and leisure and entertainment.
Fueled by the remote work situations brought about by the pandemic, office and retail space valuations fell by roughly 15 percent in March. Mortgages secured by office properties are particularly vulnerable, with distressed commercial real estate loans having risen to 5.2% in February.
Further increasing the likelihood of default rates on commercial mortgages is last weekend’s collapse of another substantial bank, the third major bank to fail in the last two months. Bank closures of this magnitude tend to influence many banks and other capital providers to cut back on lending and the purchase of mortgage-backed securities, a development that in turn can add further challenges for refinancing a wave of commercial mortgage loans scheduled to mature over the next several years.
This increasing threat of a recession and increased unemployment caused lawmakers, including Sen. Elizabeth Warren (D-MA) and Rep. Pramila Jayapal (D-WA), to draft a letter to Chair Powell on Monday, urging the Federal Reserve to pause additional rate hikes.
Ballard Spahr's multidisciplinary Distressed Assets and Opportunities team is helping clients navigate an economy where the cost of capital is likely to continue to increase 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 the team.
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