Impact of the Fed’s last rate cut in 2024

Impact of the Fed’s last rate cut in 2024

The Fed announces a 25 basis point cut in US interest rates

Today’s 25 basis point cut in US interest rates is welcomed by markets and continues to be in line with investor expectations. However, the market’s focus will quickly turn to the Federal Reserve’s (Fed) path forward and what that could mean between now and next year.

As the U.S. economy continues to struggle with stubborn inflation, 2025 could bring new challenges to the landscape in the form of a change in policy (trade, immigration, regulatory burden, etc.) initiated by the new White House administration. Earlier this year saw a notable shift in markets and the Fed away from an excessive focus on inflation and towards the labor market. However, as progress in containing inflation appears to have stalled or slowed and political uncertainty increases, inflation is returning to the spotlight.

Has inflation progress stalled?

After cutting interest rates by a total of 100 basis points since September, the US Federal Reserve is reaffirming its measured approach to this easing cycle. At the November policy meeting, Federal Reserve Chairman Jeremy Powell noted, “There is nothing in the economic data that suggests the committee needs to rush.” Powell added that policymakers can afford to be “a little more cautious “” while they cut the key interest rate to a neutral level because the US economy has shown surprising resilience.

The headline consumer price index (CPI) rose to 2.7% in the 12 months to November, up 0.3% month-on-month from October (seasonally adjusted). The core CPI, which takes food and energy into account, rose 3.3% on an annual basis in November and has risen 0.3% since October. The November producer price index (PPI), which rose 3.0% on an annual basis and 0.4% on a monthly basis, is now at its highest annual rate since February 2023.

After weather and strike-related disruptions caused some excitement in October’s labor market data, U.S. employers added 227,000 jobs in November (beating the consensus forecast of 220,000 jobs). Job gains for September and October were also revised upwards by a total of 56,000. Wage growth also increased in November by 0.4% month-on-month (+4.0% on an annual basis), while the unemployment rate rose to 4.2% from 4.1%. On the small business side, the National Federation of Independent Business reported that its small business optimism index rose in November to its highest level since June 2021. Taken together, signs of stubborn inflation and a robust labor market support the slower pace of Fed rate cuts in 2025.

Addressing the elephant in the room – trade tariffs

Speculation about possible policy changes by the new White House administration has reached fever pitch over the past month. While the prospect of trade tariffs, comprehensive immigration reform, and tax changes make for compelling headlines, we don’t yet know what policies will take shape in 2025 and what impact they will have on the U.S. economy, inflation, and subsequent monetary policy decisions. Currently, we have more questions than answers about how potential policy changes in 2025 could impact the economy, markets and commercial real estate.

First – which policies will be prioritized? Tariffs, tax cuts, deregulation and immigration are all up for debate, but it remains unclear what will actually receive attention and support. Second, to what extent will existing policies and regulations change on these prioritized issues? To assess the potential impact, we first need to know what is changing. Third, what is the timing or when will these priorities take effect where significant change will occur? These questions will certainly be examined by Fed and FOMC members as they consider the future path of monetary policy, and we may gain clarity on some of these questions in the coming weeks and months. However, at this point, it’s still too early to make any calls with confidence without making some very big assumptions.

Despite the many questions that need to be answered and the hard data needed to support a safer Fed path forward, there are signs of optimism for the year ahead, reflected in business sentiment and recent market performance. Given current market moves and indications of consumer and business sentiment, there appear to be many who are optimistic.

What impact will this Fed rate cut have on US commercial real estate?

As with any interest rate adjustment, it is important to emphasize that changes in monetary policy take time to take hold and become visible in the market. In the short term, the impact of US interest rate cuts – as well as the prospect of further rate cuts – is providing relief in the form of increased sentiment and confidence in capital markets around the prospect of lower cost of capital in the future. Yet even after three rate cuts, the fed funds rate remains well above the peak fed funds rate before the pandemic; Therefore, it will likely take further cuts – or perhaps the normalization and widespread acceptance of a higher interest rate environment – ​​to see a strong rebound in activity in the U.S. commercial real estate market.

Lower capital costs naturally support more development and transaction activity. However, just as important (if not more important) to the cost of capital is the availability of capital. While easing monetary policy can reduce the cost of financing, that doesn’t matter if the capital isn’t available to those who seek it.

While the Fed’s pace of rate cuts may frustrate many, particularly in industries that rely heavily on debt and capital markets financing such as commercial real estate, there are still reasons for this approach. Sometimes it seems like the Fed takes too long to make a move, but that’s because FOMC members are trying to ensure they don’t make counterproductive or unfounded decisions.

However, the recent cycle has shown that in times of major market distress, the Fed will act boldly and quickly to ensure proper market functioning – and perhaps this can provide some measure of comfort. Currently, market sentiment appears to be optimistic and the outlook and expectations for the coming year have increased.

Even if the easing of monetary policy is not immediately felt by CRE investors, CRE is not an “immediate” asset class and investors are already thinking and planning for the coming years and what the market environment might look like then. While sentiment appears to be improving across many areas of the capital markets and economy, the CRE markets are thawing – and we should get a better sense of how quickly they will warm up next year.

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