Employment Data Not Swaying Fed to Cut Interest Rates Right Away

Based on what it is seeing in the employment market, the Federal Reserve isn’t facing a lot of pressure to reduce rates, according to John Chang, Senior Vice President and National Director of Research and Advisory Services, Marcus & Millichap.

The past two months have shown accelerating job creation and that’s likely causing the Federal Reserve to hold off on the rate cuts for a bit, said Chang, speaking on his firm’s recent industry news video.

During Chairman Powell’s appearance on “60 Minutes” a little over a week ago, Chang said he offered a strong clue when he said, “We have a strong economy. Growth is going on at a solid pace. The labor market is strong, with 3.7% unemployment, and inflation is coming down.

“With the economy strong like that, we feel like we can approach the question of when to begin reducing rates carefully.

“The kinds of things that would make us want to move sooner would be if we saw weakness in the labor market or if we saw inflation really persuasively coming down.

“The kind of things that would make us want to move later would be if inflation were to be more persistent, for example.”

Chang translated that to mean the Fed feels good about where things are right now and they don’t feel any urgency to make a rate cut.

“As a result, looking at it from the Fed’s standpoint and considering the Fed’s dual mandate to achieve maximum employment and keep prices stable, the economy is pretty much in the Goldilocks zone,” Chang said.

“So, the Fed’s decision to hold off on rate reductions honestly makes sense, but looking forward, the overnight rate is probably too restrictive and the Fed knows that, which is why they’re clearly signaling a rate cut this year.”

Chang said no one knows exactly when or by how much, “but we do know what the trajectory will be, and that’s why many commercial real estate investors are positioning to deploy more capital this year,” Chang said.

During the “60 Minutes” interview, Chairman Powell enumerated the many risks that are still out there, but the overall outlook remains favorable.

Chang said the two-month bump in job creation alone will not spur inflation. In fact, the annualized pace of inflation over the last six months is actually below the Fed’s 2% target.

Additionally, looking at inflation over the last three months on an annualized basis, core PCE is just 1.5%, well below the Fed’s target.

Chang said the economy regarding commercial real estate is also strong. The sub-sector with the most net job gains is warehousing and storage, which now employs almost 35% more people than it did in 2019.

Professional and business services, which historically supported office demand, are now 7.2% higher than it was before the pandemic, he added.

And in the fourth quarter of 2023, an additional 21 million square feet of office space was filled.

That’s the first quarter of positive office absorption since the second quarter of 2022.

Construction employment is 6.9% above pre-pandemic levels, which makes sense as apartment completions are expected to reach a record 480,000 units in 2024.

Industrial completions, which delivered a record 423 million square feet in 2023, are set to complete a still elevated 360 million square feet in 2024.

“But like I said earlier, I don’t think the Fed feels any real urgency to reduce rates,” according to Chang.