Last Saturday night, if you wondered whether the Federal Reserve would cut interest rates and you checked CME FedWatch, which follows the futures market for predictive value, you would have seen a 96% chance of a 25-basis-point cut. That was 200 basis points lower than a similar check a few days earlier.
What might make this seem odd is that the Consumer Price Index report for November showed an increase of 2.7%. October also showed rising inflation. Cutting rates would seem the opposite of what the Fed might have been expected to do, keeping things steady.
The reason, according to ABC News interviews with experts, is that even with another cut, rates remain “historically high.” "I don't think the recent inflation has diverged enough from what the Fed expected to change its outlook," said William English, a Yale University finance professor and former Fed official to ABC News. After the previous cuts, the federal funds rate ranges between 4.50% and 4.75%.
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Yeva Nersisyan, a professor of economics at Franklin & Marshall College, told ABC News that a quarter percentage point would be unlikely to make a significant impact on inflation.
However, the comparison to recent economic history is a relatively small sample. Over a longer range, higher interest rates seem more of a reversion to a fuller historical mean rather than an unusual period of low interest after the Global Financial Crisis.
“A December rate cut by the Federal Reserve, in light of recent CPI and PCE headline and core upticks, may not be the most prudent monetary policy action,” said Ermengarde Jabir, Moody’s director of economic research, in prepared remarks. “While it's key not to hinge long-term strategy on short-term data fluctuations, the trajectory of recent cuts, starting with September’s 50 bps cut, may be risky and aren’t reflective of macro-economic conditions such as low unemployment and strong GDP growth.” Jabir continued to note that inflation is still not at the 2.0% target rate.
“If interest rates continue to step down, it's the multifamily sector that stands to benefit the most in the immediate term, eclipsing other commercial real estate asset classes, particularly office,” added Kevin Fagan, Moody’s head of CRE economic analysis. “With lenders staying cautious on office, a moderate decrease in interest rates hardly offers a lifeline for most maturing office loans.”
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