Federal Reserve Still Sees 3 Rate Cuts In 2024 But Holds Rates Steady For Now

The Federal Open Market Committee on Wednesday didn't budge on interest rates, noting that it “does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent,” the central bank said in a statement.

Nine FOMC members said they believe three interest rate cuts this year are appropriate, in line with what the committee indicated in December. Five other members indicated that two cuts would be the correct course, according to materials released by the Federal Reserve Wednesday. 

Fed Chair Jerome Powell expanded on the likelihood of rate cuts with a chance of further hesitation during a press conference Wednesday. 

“We believe that our policy rate is likely at its peak for this tightening cycle and that if the economy evolves broadly as expected, it will likely be appropriate to begin dialing back policy restraint at some point this year,” Powell said. “The economic outlook is uncertain, however, and we remain highly attentive to inflation. We are prepared to maintain the current target range for the federal funds rate for longer, if appropriate.”

Most of the commercial real estate industry has waited on pins and needles for an interest rate cut for months, looking for relief from the financing squeeze instigated by rate increases. Although the industry wants the cuts, not everyone is confident they will happen, citing the persistently high cost of housing.

Matthews Real Estate Investment Services Vice President Brian Brady told Bisnow he is skeptical that there will be three interest rate cuts this year given that shelter inflation is still relatively high. The Bureau of Labor Statistics put annual shelter inflation at 5.7% in its February report, and shelter costs have been the largest contributor to overall inflation for months. 

“The San Francisco Fed thinks shelter inflation goes upside down this summer,” Brady said. “Great. Then we do see three cuts this fall. But every time I read the minutes, it seems like they're hung up on shelter inflation, as they should be, and I just don't know how you work three cuts into that.”

But even the prospect of cuts is good for real estate, according to EQTY | Forbes Global Properties CEO Mike Shapiro.

“I'm looking forward to these rate cuts, and I think that the idea that the rate cuts are coming is very positive,” Shapiro said. “The stock market is reacting positively, and there's massive correlated behavior between the stock market and real estate.”

On Wednesday, the Dow was up nearly 1% after the Fed's announcement, and the S&P 500 and Nasdaq indexes experienced similar upticks.

This marks the fifth meeting at which the Federal Reserve held still on interest rates, with the central bank's discount rate at 5.25% to 5.5%. 

Inflation, though much lower than it was this time last year or the year before, remains stubbornly higher than the Fed's target of 2%. In February, the headline consumer price index came in at an annual rate of 3.2%, according to the Bureau of Labor Statistics. The so-called core rate of inflation, without the volatile food and energy sectors, was even higher, at an annual rate of 3.8%.

The Fed anticipated a recession from the dramatic interest rate increases, and thus quicker deflation, but that hasn't happened, Steinbridge Group CEO Tawan Davis told Bisnow on Wednesday.

“We're more globally connected than ever, and information flows more quickly than when the Fed was established,” Davis said. “And there has been a decoupling of Wall Street from Main Street. Wall Street has responded to inflationary pressure, and the market has rallied. Main Street industries, like real estate, haven't responded in kind, and the Fed has had to sustain higher interest rates.”

The federal funds rate is the highest it has been in more than 20 years. In May 2000, it peaked at 6.25% to 6.5%, and in June 2006, not long before the Global Financial Crisis, the rate reached 5% to 5.25%.

Though high compared with rates for most of the last 25 years, today's interest rates are closer to the historical norms of the 20th century.

High interest rates continue to impact commercial real estate, and other factors, such as the underutilization of office space, are applying pressure to industry fundamentals.

The delinquency rate for CMBS loans associated with office assets came in at 6.6% in February, according to Trepp, up from 2.4% a year ago. Overall, the CMBS delinquency rate for all property types was 4.7% in February, up from 3.1% a year earlier.

At the beginning of the year, about 19.6% of office space in major U.S. metros was vacant, according to Moody’s Analytics, up from 18.8% at the end of 2022 and higher than the previous record of 19.3%, reached in 1986 and 1991. Work-from-home was a factor in the rise, but a legacy of overbuilding during the long periods of low interest rates this century also played a role. Office development activity in 2023 was the lowest it has been since 2012.

UPDATE, MARCH 20, 5:30 P.M. ET: This story has been updated with comments from Federal Reserve Chair Jerome Powell and commercial real estate professionals.