Fed Cuts Another 25 Basis Points

The Federal Reserve’s Federal Open Market Committee cut another 25 basis points from the benchmark federal funds rate today as many expected.

LPL Financial Chief Economist Jeffrey Roach in an emailed statement called the move “widely expected and well-choreographed.”

A bonus is a slight move back on the 10-year Treasury yield as bond traders may be calming over whatever immediate concerns they faced from the election. During trading at 3 p.m. Eastern time, it was about 4.35%, down from Wednesday’s close of 4.42%. The Fed’s moves don’t directly affect longer-term financing, but the cut provides emotional reassurance that rates will continue to drop for some amount of time, and so the anticipation of higher rates and possibly inflation edges down.

Both short- and long-term rates are important to different aspects of commercial real estate. Short term rates more directly affect such loans as bridge and construction loans. Longer-term rates have an impact on longer-term commercial mortgages.

The official statement from the Fed is the stuff of what one might expect having watched the communications over time. The FOMC stressed the dual duties of controlling prices with 2% inflation over the long run and maintaining maximum employment. They also mentioned an “uncertain” economic outlook, unemployment rate that is still low, and continued economic growth “at a solid pace.”

“With consumers feeling a bit more upbeat and public markets reaching record highs, the combination of strong economic fundamentals and declining interest rates could create an ideal backdrop for CRE investments over the medium term,” BGO Chief Economist and Head of U.S. Research Ryan Severino said in emailed remarks. “Certainly, risks remain, but thus far they seem surmountable by the economy’s momentum.”

“The primary concern for the Fed is the potential for tight credit conditions to hinder businesses’ borrowing and hiring, which could further slow job growth,” wrote Greg Friedman, chief executive officer of Peachtree Group, an investment group and also CRE lender. “A recent study suggests that restrictive credit could raise unemployment by up to 0.5% by late 2024. With inflation at 2.1% and unemployment at 4.1%, policymakers are optimistic that inflation will continue to ease, reducing the need to maintain excessively high rates. However, these elevated rates will remain a headwind for commercial real estate as it works toward stability.”

But Friedman adds that going forward, “growth-focused policies” of the new administration could place upward pressure on interest rates, “potentially countering the Fed’s easing path” and likely keeping interest rates higher for the next few years.

Looking ahead to 2025, the potential for further rate cuts could narrow as President-elect Trump’s growth-focused policies place upward pressure on interest rates, potentially countering the Fed’s easing path. These inflation-driven policies will likely keep the U.S. in a higher interest rate environment for the next several years.