Is This It?

The Federal Reserve on Wednesday raised the benchmark borrowing rate 25 points, continuing a months-long trend. But might the board be nearing an end to the hikes given investor angst and the tumult in the banking industry? It might. Meanwhile, keep an eye out on held-to-market securities and uninsured deposit percentages. They’ll tell you where all of this is going.

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— Tom Acitelli, Co-Deputy Editor

Fed Indicates Possible End to ‘Ongoing Increases' After 25bp Hike

Fed Chair Jerome Powell told reporters Wednesday that banking developments in the last two weeks will likely lead to “tighter credit conditions,” but it is unknown how that will affect future interest rate decisions. He said the Fed’s interest rate target for the end of 2023 is 5.1 percent, and the central bank remains committed to bringing inflation down to 2 percent. The 25 basis point hike announced Wednesday afternoon, which placed the federal funds rate between 4.75 and 5 percent, was lower than the half-point increase economists had forecast following Powell’s March 7 testimony on Capitol Hill. The days following Powell’s remarks pointing to an overheated economy saw dramatic changes to market sentiment, with the collapse of Silicon Valley Bank on March 10 and Signature Bank 48 hours later spurring uncertainty for the regional banking system and CRE lending. The central bank’s second consecutive quarter-point increase followed a half-point jump in December on the heels of four straight 75 basis point increases from June to November. The Fed has now executed seven straight rate increases overall creating a far different climate from near-zero short-term borrowing conditions the CRE industry enjoyed a year ago. The dramatic interest rate shift over the past year prompted the Real Estate Roundtable to issue a March 17 letter calling for financial services regulatory agencies to implement a program arming lenders with flexibility to work with borrowers on “troubled” CRE debt restructurings. A similar initiative was established in 2009 amid the Global Financial Crisis (GFC) and 2020 during the height of the COVID-19 pandemic.

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The Next Domino

As the U.S. banking system continues to face a period of uncertainty following multiple high-profile bank failures, data culled from the balance sheets of regional and multinational banks could point toward where the prime pressure points in a vulnerable system may lie. Economists have identified unrealized losses on long-term securities and the percentage of uninsured customer deposits above the Federal Deposit Insurance Corporation (FDIC) threshold of $250,000 as the best indicators of bank strength in the current economic environment. “You have this complex relationship between solvency and liquidity, and management quality,” said Joseph Mason, professor of finance at Louisiana State University and former senior economist at the Office of the Comptroller of the Currency. “Think of solvency, or decreased equity, as susceptibility to a run. And if a bank is weak financially and if they experience a deposit outflow, they’ll die.”

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