The Fed Just Changed Real Estate Forever — Here Is What Comes Next

Michael Zuber (0:00)

All righty, folks, she's back. The one and only Anna Kelly. We are gonna talk Fed rate decision. We're gonna talk about what's coming next. We'll talk about two trillion, yes, two, that's with a T, not a B, trillion dollars in bad multifamily loans. When does that come to market? We'll talk about where we go and what happens next. And yeah, we'll probably touch on oil and the Iran conflict war, whatever we're calling it these days.

Anna, hope all is well, how you doing?

Anna Kelly (0:29)

It's doing, I'm doing well, and it's great to be back with you.

Michael Zuber (0:33)

Absolutely loved speaking with you. We've been doing this eight years or so, so it's always good to catch up with a friend. I guess we'll start with looking backwards before we look forward. We obviously got the rate decision. It was 12 to zero, so unanimous vote. We got a dot plot that leaned more hawkish than many expected.

We have an October and a December meeting. There's pretty strong odds that we get at least one more rate hike this year, which probably surprised a lot of people. So of everything that happened last week with the Fed, what surprised you most? Did anything surprise you? What are you thinking?

Anna Kelly (1:10)

Yeah, I think the only thing that surprised me is that it was unanimous. I expected a quarter point.

At this point, inflation has gotten high enough outside of where their target is, and it just continued to go in that direction.

And a lot of that, I thought, is it possible they hold tight? Because we did see some softening in consumer confidence. We've seen a lot of downward revisions in jobs and hiring, and I've actually had job losses over the last several quarters and several years.

So I thought that could be enough for them to hold tight since a lot of people think that most of the inflation right now is a result of the war, and continued supply chain shocks that are related to war, oil prices, diesel prices, et cetera, in addition to ongoing tariff wars, for lack of a better word, the soft wars. And so part of me thought, is it possible that they look through that and say, this inflationary bump is a nothing burger and it's going to go away and be flat? I thought that was possible. But as we got closer, I thought, we're going to go for the quarter point. Because if we didn't, the bond vigilantes, the bond market would rail, and they already were. And so what a lot of people don't really realize is if you look historically, the Fed tends to lag, even though they're supposed to be a leading indicator, they tend to lag the two-year treasury by a few months. And so when the two-year treasury keeps going up and the 10-year treasury keeps going up, the bond markets are speaking to the Fed and saying, we don't think you're doing a good job, and we think inflation is going to get out of control if you don't act. And so I think for that reason, primarily, they had to hike a quarter. I think if they had gone any higher, Michael, it would have created too much fear in the marketplace and too much reaction to all the private credit, private debt that has to be refinanced. It would have been too big of a shock, I think. So a quarter point is what I expected. I do think that they'll probably raise another quarter point, although it really depends on how settled the bond market gets, whether there's any end in sight. And I don't think you're going to know that between now and October to November. In fiscal spending, the end of the war, elections are coming, and they don't like to do anything that could be considered political right before an election. So if anything, they go up, it's probably another quarter point, or maybe they sit tight because of the election, and they say, let's see how this quarter point trickles through. So I think that's my initial reactions.

Michael Zuber (3:50)

I think there's a lot there I want to poke at, because again, we're trying to help other folks kind of see the economy. The first thing I noted that you talked about that I think is worth digging into is the horrible consumer sentiment numbers. The consumer sentiment is an interesting survey because it's over 50 years old. So you have a big track record. It means you have the 87-stock crash. It means you have Y2K. It means you have the.com. It means you have the GFC. It means you have COVID.