Trending
THE RISK OF RECESSION has increased as the outlook has darkened for commercial real estate. In this unusually busy news week, there was little focus yesterday on the Federal Reserve’s biannual Financial Stability Report, which warned of a potential crisis in this interest rate-sensitive sector.
THE MAIN RISK is that commercial borrowers will not be able to refinance their loans when the loans reach the end of their term, the report said. This could increase “the magnitude of a correction in property values,” which could be sizable and therefore could lead to credit losses by holders of commercial real estate debt,” the report said.
STILL STUNG BY ITS SLOW REACTION to bank failures this spring, the report pledged that “the Federal Reserve has increased monitoring of the performance of C.R.E. loans” and has “expanded examination procedures for banks with significant C.R.E. concentration risk.” the report said.
AS WE REPORTED LAST MONTH, commercial real estate — especially here in Washington, D.C. — appears to be moribund, as employees continue to work at home. Many downtowns in the U.S. look nearly deserted.
THE REPORT WARNED of deteriorating conditions in the bank sector in general. It’s getting more difficult to borrow, the report said, and this could “lead banks and other financial institutions to further contract the supply of credit to the economy.” It added that “a sharp contraction in the availability of credit would drive up the cost of funding for businesses and households, potentially resulting in a slowdown in economic activity.”
THIS, IN OUR OPINION, is perhaps the strongest argument for the Fed to pause its rate increases; tomorrow’s Consumer Price Index will be crucial. Interest rate reductions later this year still seem unlikely — but a clearly deteriorating commercial real estate sector is an ominous wild card, as yesterday’s Fed report indicated.
AS THE SUSPENSE BUILDS over this afternoon’s White House summit on the budget, it strikes us that a Constitutional challenge to the debt ceiling is gaining supporters. But any attempt to use the 14th amendment to wiggle out of a debt deal would generate a fierce blowback from Republicans, with a quick legal path to a Supreme Court ruling.
THE WHITE HOUSE is determined to use every tactic available to avoid a default, and novel legal and regulatory approaches are now on the table. Our best bet is that both sides will pledge this afternoon to re-double their efforts, but if there’s no deal by early June, an extension until fall would be the most likely outcome. A deal is still weeks or months away.
Related: US Inflation Progress Might Stall, but Fed Must Drop Rate Hikes Agenda