By Ryan Wangman
September 18, 2024
At long last, it’s here.
The Federal Open Market Committee cut the target range for the federal funds rate by a surprising 50 basis points Wednesday, the first rate reduction since the onset of the coronavirus pandemic. The move came alongside a Federal Reserve projection that it will cut rates by an additional 50 bps before year-end.
In light of the progress on inflation and the balance of risks, the committee decided to lower the target range for the federal funds rate by half a percentage point to 4.75% to 5%.
In remarks after the announcement, Federal Reserve Chairman Jerome Powell said the committee would make further interest rate decisions “meeting by meeting,” but he projected the federal funds rate would be 4.4% at the end of this year and 3.4% at the end of 2025.
“These median projections are lower than in June, consistent with the projections for lower inflation and higher unemployment as well as the change in balance of risks,” Powell said. “These projections, however, are not a committee plan or decision. As the economy evolves, monetary policy will adjust in order to best promote our maximum employment and price stability goals.
“We'll move as fast or as slow as we think is appropriate in real time.”
Powell addressed a query on whether such a big drop indicated the Fed was playing catch-up given recent substantial revisions to employment data.
“We don't think we're behind,” Powell said. “We think this is timely, but I think you can take this as a sign of our commitment not to get behind.”
A cut was widely anticipated by economists and key players across commercial real estate, though expectations had settled on a 25-basis-point cut.
Capital markets confidence will likely increase now that the Fed is beginning the cutting cycle it has hinted at for several weeks. The central bank had held its elevated discount rate for more than a year, leaving CRE struggling to adjust to a higher-for-longer capital environment.
Nine FOMC members said they think 50 bps in additional cuts this year is appropriate, with one anticipating an additional 75 bps, according to materials released Wednesday following the body's two-day meeting. Seven other members said one 25-bps cut would be the proper course of action, while two members anticipate no additional cuts in 2024.
Wednesday’s meeting included a rare moment of dissent when Michelle Bowman became the first Fed governor to vote against an interest rate decision since 2005. Bowman had advocated for a quarter-point cut.
Many people thought the central bank would have cut rates sooner than this meeting, said Ryan Severino, chief economist and head of U.S. research at BGO. Severino said he expected there would be some residual hesitancy in the market that will take time and confidence to unwind.
“They have left rates elevated for more than a year, which I don't think most people had on their bingo card at the start of the year,” Severino said. “I'm not saying that was the right view to take — I'm simply saying that there's a little bit of a Fed Who Cried Wolf kind of mentality in the marketplace.”
Severino said he believes a 50-bps cut isn't warranted by the economic data at this point, and the Fed's decision to make this aggressive of a cut could signal that the underlying dynamics in the economy are worse than they may appear on the surface.
“I worry a little bit that 50 bps might scare people,” Severino said. “But I do think one way or another that you're going to see a positive response function from the commercial real estate markets as the Fed cuts.”
The Fed was well positioned to make the move after inflation ticked down over the past few months and the job market softened.
The central bank’s preferred inflation indicator, the personal consumption expenditures index, rose 2.6% year-over-year in July — still above the Fed's 2% target, but much lower than a 2022 peak of 7.1%. A weak jobs report in early September strengthened the case.
Now that the first rate cut is a reality, its psychological impact may be greater than the movement itself, said Liz Holland, CEO of Chicago-based Abbell Associates. More private owners will feel comfortable selling as rates come down, she said.
But if they have held on for this long, they may wait for the next 12 to 18 months to decide to transact, Holland said.
“The beginning of a reduction in rates will generate activity because everyone will finally know that it's not going to get worse,” Holland said. “There's something to be said for knowing that this is as bad as it's going to be.”
The Fed move was greeted with relief by many in CRE, though LHMeyer economist Derek Tang sounded a note of caution about how cuts could play out in an interview earlier this month.
“As interest rates come down, a lot of real estate assets might start to look more attractive, but we also have to remember, one of the reasons why interest rates are coming down is also because the labor market is weakening,” Tang said. “If people are getting less work or they're getting paid less, that's not necessarily good news for real estate.”
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