Implication of the last Fed 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 remains in line with investor expectations. However, the market’s focus will quickly turn to the Federal Reserve’s (Fed’s) path forward and what it may mean over the next year.

As the US economy continues to struggle with stubborn inflation, 2025 could introduce new challenges to the landscape in the form of shifting policies (trade, immigration, regulatory burdens, etc.) ushered in by the new administration in the White House. Earlier this year there was a remarkable shift from the markets and the Fed away from being hyper-focused on inflation and towards the labor market. But as progress in taming inflation appears to have stalled or slowed and political uncertainty grows, inflation is returning to the spotlight.

Has inflation progress stalled?

After cutting the benchmark Federal Funds rate by a combined 100 basis points since September, the Fed has reiterated its measured approach to this easing cycle. At the policy meeting in November, Federal Reserve Chairman Jeremy Powell noted, “Nothing in the economic data suggests that the committee needs to be in a hurry.” Powell added that policymakers can “afford to be a little more cautious” as they push the policy rate down to a neutral level as the US economy has shown surprising resilience.

Headline consumer price index (CPI) rose to 2.7% for the twelve months ending November, up 0.3% month-on-month from October (on a seasonally adjusted basis). Core CPI, which strips out food and energy, rose 3.3% at an annual rate in November and 0.3% from October. November’s producer price index (PPI), which rose 3.0% year-on-year and 0.4% month-on-month, is now at its highest annual rate since February 2023.

After weather and strike-related disruptions created some noise in October’s labor market data, US employers added 227,000 jobs in November (above the consensus forecast of 220,000 jobs). Job growth for September and October was also revised upwards by a total of 56,000. Wage growth also rose 0.4% in November compared to the previous month (+4.0% year-on-year), while the unemployment rate rose from 4.1% to 4.2%. On the small business side, the National Federation of Independent Business reported that its small business optimism index jumped in November to the highest level since June 2021. Together, signs of stubborn inflation and a resilient labor market support the Fed’s slower rate. cuts in 2025.

Addressing the elephant in the room – trade tariffs

Over the past month, speculation surrounding the potential policy changes brought by the incoming White House administration has reached a fever pitch. While the prospect of trade tariffs, major immigration reform and tax changes make for compelling headlines, we don’t yet know what policies will take shape in 2025 or what impact they will have on the US economy, inflation and subsequent monetary policy. decisions. At this point, we have more questions than answers about how potential policy changes could affect the economy, markets and commercial real estate in 2025.

First – which policies will be prioritized? Tariffs, tax cuts, deregulation and immigration are all on the table, but it remains unclear what will actually attract attention and support. Second – of these priority questions, to what extent will existing policies and regulations change? To assess the potential impact, we first need to know what is changing. Third – what is the timing of priorities that see meaningful changes or when will these take effect? These issues are certainly being examined by the Fed and FOMC members as they consider the monetary policy path forward, and we may gain clarity on some of these issues in the coming weeks and months. Right now, though, it’s too early to call 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 more confident path forward for the Fed, there are signs of optimism for the coming year seen in business sentiment and recent market developments. Based on current market movements and indications of consumer and business sentiment, there appear to be many who feel optimistic.

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

As with any interest rate adjustment, it is important to reiterate that changes in monetary policy take time to flow through and materialize in the market. In the near term, the impact of interest rate cuts in the US – as well as the prospect of further interest rate cuts – provides relief in the form of increased sentiment and capital market confidence on the prospect of future lower cost of capital. But even after three rate cuts, the Fed Funds rate remains well above the pre-pandemic peak Fed Funds rate; so it will likely take further cuts – or perhaps normalization and broad acceptance of a higher interest rate environment – ​​to see a strong recovery in activity across the US commercial real estate market.

A lower cost of capital naturally supports more development and transaction activity. But just as (if not more) important to the cost of capital is the availability of capital. While an easing of monetary policy may make financing less costly, it does not matter if the capital is not available to those who seek it.

While the Fed’s pace of rate cuts may frustrate many, especially those in industries that rely heavily on debt and capital market financing, such as commercial real estate, there is rationale in the approach. Sometimes it can seem like the Fed is taking too long to make a move, but that’s because FOMC members are trying to make sure they don’t make any counterproductive or unsubstantiated decisions.

That said, the recent cycle showed that in times of major market trouble, the Fed will act boldly and quickly to ensure the market is functioning properly—and that may provide some comfort. So far, the market sentiment seems optimistic with a boost in the outlook and expectations for the coming year.

Although monetary easing is not immediately felt by CRE investors, CRE is not an ‘immediate’ asset class and investors are already considering and planning for the coming years and what the market environment may look like then. While sentiment appears to have picked up across many aspects of capital markets and the economy, CRE markets are starting to thaw – and we should get a better sense of how quickly they will heat up over the next year .