Federal Reserve Signals One Rate Cut in 2024!

Federal Reserve Signals One Rate Cut in 2024!

CRE Grows Increasingly Impatient

The Federal Open Market Committee (FOMC) held interest rates steady on Wednesday, marking the seventh consecutive meeting where it kept the central bank’s discount rate between 5.25% and 5.5%.

Federal Reserve Chair Jerome Powell answered reporters' questions, stating that only one rate cut is expected before the end of the year, a notable shift from the three cuts anticipated in March. Seven FOMC members believe one interest rate cut this year is appropriate, while four anticipate no cuts, according to materials released Wednesday. Eight other members project two cuts as the proper course of action.

Powell emphasized during the press conference that the central bank needs more time to gain the confidence required to loosen fiscal policy, with overall economic data guiding their decisions. “Rate cuts that might have taken place this year will take place next year,” Powell said. “There are fewer rate cuts in the median this year, but there's one more next year. So, if you look at year-end 2025 and 2026, you're almost exactly where you would have been, just moved later. We'll have to see where the data light the way.”

Long-term Interest Rate Projections

The committee projects four cuts in 2025, four more in 2026, and two additional drops thereafter, until the rate settles at a long-run interest rate of 2.8%, which policymakers estimate as the “neutral rate” that is neither stimulative nor restrictive. This long-run rate of interest moved up to 2.8% in June from 2.6% in March.

Inflation and Economic Data

The decision was widely anticipated by economists, especially given recent inflation data. The most recent consumer price index showed that prices ticked up 3.3% on an annualized basis in May, but the slowdown in inflation sputtered in the first three months of 2024, stymying investors' hopes for assertive rate cuts.

Impact on Commercial Real Estate (CRE)

The news was a blow to commercial real estate players, who have been advocating for the Fed to reduce rates and ease tensions in a tough financing environment. “The question for real estate is how much longer can investors hold out?” said Derek Tang, an economist at LH Meier. “If this is going to be a longer-term trend, then we're going to need some permanent solutions.”

Fed’s Commitment to Reducing Inflation

The central bank stated that there has been “modest progress” toward its 2% inflation objective but doesn’t expect to reduce rates until it has “gained greater confidence that inflation is moving sustainably” in that direction. Powell noted that high rates have significantly impacted housing and that the best remedy is to slow down inflation. “The best thing we can do for the housing market is to bring inflation down so that we can bring rates down so that the housing market can continue to normalize,” Powell said.

Market Reaction and Global Financial Trends

U.S. CRE stocks weren’t significantly moved by the rate news. REITs in the FTSE Nareit U.S. Real Estate Index were up 1.2% as of 3:15 p.m. ET Wednesday. Nancy Vanden Houten, lead economist at Oxford Economics, noted that markets are forward-looking and confident that the Fed is about to embark on a path of steadily lowering rates.

Globally, other financial arms are beginning to loosen their grips. The Bank of Canada trimmed its key policy rate last week for the first time in four years, and the European Central Bank followed suit, making its first interest rate cut since 2019.

U.S. Labor Market and Economic Outlook

The U.S. labor market continues to perform well, with the Bureau of Labor Statistics reporting that the economy added 272,000 jobs in May, beating consensus expectations. However, other parts of the domestic economic landscape are clouding the Fed’s decision-making. Ryan Severino, chief economist and head of U.S. research for BGO, said that while the Fed could cut rates later this year, it doesn’t have infinite time. “But letting other central banks cut first affords it the ability to watch and see what happens, which could provide it with more evidence and greater confidence to cut rates later this year.”

 

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