Fed Chair Signals Rate Cuts Might Not Be Far Off

Federal Reserve Chair Jerome Powell indicated at a congressional hearing Tuesday that the central bank is inching closer to cutting its benchmark interest rates.

Powell said he was encouraged by recent evidence of cooler inflation and that "more good data would strengthen our confidence that inflation is moving sustainably toward 2%." But Powell disappointed those hopeful for an explicit declaration of a rate reduction timeline. 

"I’m not going to be sending any signals about the timing of future actions," Powell said at the hearing. 

Powell said the Fed will make its calls on rate decisions on a meeting-by-meeting basis. 

The Fed's preferred inflation gauge, the personal consumption expenditures price index, rose 2.6% year-over-year in May, the lowest increase since 2021, although it remains above the Fed's 2% target. 

Powell told lawmakers that the labor market is slowing and stressed that there are competing risks for policy decisions — moving too quickly or moving too slowly. 

The central bank head continued to highlight the risk to the Fed’s dual mandates, full employment and price stability, keeping a September rate cut on the table, Bloomberg reported. The Fed's next meeting is at the end of July, but economists don't expect it to cut rates until September at the earliest. 

"The most recent labor market data do send a pretty clear signal that labor market conditions have cooled considerably compared to where they were two years ago," Powell said. "This is no longer an overheated economy."

Rate cuts in the relatively near term are already being priced into deals getting done today, Ermengarde Jabir, director of economic research at Moody's, told Bisnow.  

"When the 25-basis-point cut comes, whether it's later this year or next year — hopefully in some shorter time horizon, certainly from a CRE perspective — it's not going to really move the needle in any significant way," Jabir said.

While most borrowers and lenders are working together as much as possible to extend loan maturity dates and avoid losses on both sides, many are running out of time, Jabir said. Commercial foreclosures have doubled in the past year, and more than $1T of CRE loans are maturing by 2025.

With rates anticipated to start dropping soon, parties may start to run calculations and determine it is better to offload a property at a discount than to try to pour more capital into it because they're trying to free up capital for another investment or other purpose, Jabir said. 

"Eventually, there is going to have to be some movement," she said. "The case may arise where the movement starts to pick up in a significant way because people start accepting that we are in a higher-for-longer environment."