April 13th 2025
With the last couple of weeks of market volatility and question marks surrounding interest rates, tariffs, inflation etc. I felt it prudent to take a step back and simply provide economic commentary from articles and speeches over the past week.
Federal Reserve Bank of Kansas City President Jeffrey Schmid spoke at the Secured Finance Network’s Independent Finance Roundtable in Kansas City last week.
He noted that the current economic landscape has become more complex due to recent tariff policies, which have increased uncertainty and contributed to rising short-term inflation expectations and declining consumer confidence. According to feedback from business leaders, inflation risks are rising while concerns about employment and economic growth are also growing. This puts the Federal Reserve in a position where it may need to carefully balance inflation control with supporting the labor market and economic expansion. Despite the theoretical belief that tariffs only temporarily impact inflation, the speaker emphasizes caution, especially given the lingering effects of recent inflation spikes. A key concern is that rising prices could entrench higher inflation expectations, which historically have proven difficult to reverse. Maintaining credibility in inflation management remains a top priority for the Fed. Looking further ahead, the outlook for interest rates is shaped by two opposing trends. First, demographic shifts—especially the aging U.S. population and slowing workforce growth—are likely to suppress interest rates over time. With fewer new workers, future economic growth will hinge on productivity improvements.
On the other hand, growing federal deficits and a possible decline in foreign demand for U.S. government debt could push interest rates higher in the long run. If more debt is issued while demand for it weakens, investors may demand higher returns, leading to increased interest rates. In conclusion, long-term interest rates will likely depend on which of these forces—aging demographics or shifting debt dynamics—proves more dominant.
JPMorgan released a short article titled "The Impacts of Inflation on Commercial Real Estate" which presents a worthwhile snapshot of post Covid to present market conditions as it relates to inflation. In summary, following the economic disruptions from 2020—like supply chain issues, rising energy costs, and global conflicts—inflation peaked at 9.1% in 2022. To combat this, the Federal Reserve raised interest rates 11 times through 2022 and 2023. While inflation eased to 2.7% by late 2024 after a few rate cuts, the Fed is cautiously monitoring broader economic indicators before making further moves, especially amid fears of stagflation or recession. In the commercial real estate sector, inflation creates a mixed bag of outcomes. On the positive side, property owners with long-term, low-interest loans benefit, and lease agreements tied to inflation can help maintain income levels. However, rising costs for labor, materials, and insurance may eat into profits—especially if landlords can’t pass those costs on to tenants. Higher interest rates often drive up capitalization rates, which, along with squeezed cash flows and increased borrowing costs, can lower property values. Inflation also raises the cost of new construction, limiting supply but boosting the value of existing buildings due to higher replacement costs. Retail and industrial real estate have performed strongly post-recession, but they’re not immune. As inflation cuts into consumer spending, both sectors face risks. Industrial properties—especially those tied to last-mile logistics—are seeing shrinking margins due to higher rent, fuel, and transportation costs. Retailers may also struggle to absorb rising occupancy expenses, which could stall future rent growth.
Focusing on the regional banking sector, Reuters discussed the release of their upcoming Q1 earnings, stating that investor focus has shifted to rising uncertainty caused by fluctuating U.S. tariff policies. Although President Trump's temporary pause on new tariffs provided a brief boost to bank stocks, concerns remain over unresolved trade tensions, particularly with China. Analysts warn this instability may suppress loan demand, which had previously been expected to grow under a more business-friendly administration. The U.S. increasing tariffs on Chinese imports—from 104% to 125%—further heightens economic risks. A slowdown in economic growth could hit regional banks hard, as they heavily depend on lending to local consumers and businesses. Unlike larger institutions, regional banks have limited trading operations, making them more vulnerable during periods of market volatility. The KBW Regional Banking Index has fallen 7.5% since the tariff announcements. Upcoming earnings reports from banks like Fifth Third, Citizens Financial, and Regions Financial are expected to face intense scrutiny, particularly regarding credit loss provisions. These reserves are forecasted to jump nearly 28% in Q1 and around 14% for the full year, reversing earlier expectations of improvement. Meanwhile, the commercial real estate (CRE) sector—already a pressure point—remains a concern. Although falling interest rates were expected to provide relief, ongoing economic uncertainty threatens that outlook. A potential decline in property values or tighter refinancing conditions could bring renewed stress to regional lenders. In short, the combination of trade instability, weaker loan demand, and CRE exposure points to a challenging road ahead for regional banks, despite early-year optimism.
The 10Y UST whipsawed last week and closed Friday hovering around 4.5%, up from a weekly low of 3.8%. We will be watching closely this week to see if that upward pressure continues in the early part of the week or begins to see some stabilization.
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