'No One Is Declaring Victory' As Fed Hints At Cuts, Holds Steady On Rates
The Federal Reserve Open Market Committee’s decision Wednesday to hold the base interest rate, and maybe cut it soon, was no doubt welcome news to the commercial real estate industry, but is seen more as a step toward regularity than a huge win.
“People don't like to use the word ‘transitory,’ but in my opinion, the entire thing was transitory,” Taurus Investment Holdings CEO Peter Merrigan told Bisnow Wednesday afternoon, referring to the spike in inflation and the central bank's monetary policy reaction.
“We'll probably go back to some kind of normality in the overall markets, assuming that there's no further massive geopolitical disruption,” Merrigan said.
Most FOMC members believe the target range for the federal funds rate will be lower next year with only one member saying the rate will be the same, according to the Fed's summary of economic projections.
Five members of the committee said the appropriate rate next year would be 50 basis points lower than it is now. Six members said the appropriate rate next year would be 75 basis points lower. If lowered 25 basis points at a time, that would mean three cuts in 2024. The base federal funds rate is 5.25% to 5.5%.
Federal Reserve Chair Jerome Powell hedged in his press conference following the committee’s announcement, especially regarding the fact that many members of the committee are in favor of rate cuts in 2024.
Powell said that while FOMC members feel interest rates are “likely at or near the peak rate for this cycle,” he didn't absolutely rule out the possibility of further rate increases.
“The economy has surprised forecasters in many ways since the pandemic and ongoing progress toward our 2% inflation objective is not assured,” Powell said. “We are prepared to tighten policy further, if appropriate ... and to keep policy restrictive until we're confident that inflation is on a path to that objective.”
He deflected when asked when it would be appropriate for the central bank to dial back interest rates.
“We are seeing strong growth that appears to be moderating,” Powell said. “We're seeing a labor market that is coming back into balance by so many measures, and we're seeing inflation making real progress. These are the things we've been wanting to see. No one is declaring victory. That would be premature and we can't be guaranteed this progress. So we're moving carefully.”
FOMC members made a median projection that if the economy evolves as projected, the federal funds rate will be 4.6% at the end of 2024, 3.6% at the end of 2025 and 2.9% at the end of 2026, Powell said, stressing that those numbers don't represent target rates or anything the Fed will do as a matter of policy, merely what members believe is likely given what they know now.
But there’s another factor to consider at the end of 2024: a presidential election.
Rate cuts earlier in the year are more likely than later, Merrigan said, because of the optics of the situation.
“Politics aren't supposed to be part of this discussion with the Fed, but the perception will be — if there's cutting going on after the summer — that that's the thumb on the scale for the election, or it will be portrayed that way,” Merrigan said.
Powell said at the press conference that the timing of the election would not have any influence over the central bank's actions.
There's no question this was a dovish Fed meeting.
— Justin Wolfers (@JustinWolfers) December 13, 2023
Markets increasingly confident the Fed will cut rates in March, and is near-certain that the first rate cut happens before June. pic.twitter.com/MSZl7ftz9q
If the Fed is really finished cutting rates, it could have some beneficial impacts for CRE, even if the industry has to keep waiting for cuts.
“That could potentially mean two things,” BGO Chief Economist Ryan Severino told Bisnow via email ahead of the meeting. “First, transaction volume might have bottomed. Volume has remained flat over the last few quarters providing some hope of a spring upward in the next quarter or two.”
Pricing could also rebound, Severino said.
“We've noted numerous times the potential for a turnaround once the Fed stops hiking, but for that to occur, the market needs to genuinely believe this. The longer the Fed goes without hiking again, especially as inflation continues to slow, the greater the chance the CRE market firmly believes that the Fed is done.”
The Fed’s announcement brought on a rally in the stock market, with the Dow Jones Industrial Average closing at a record high, the first time it has set a new record in nearly two years. The yield on 10-year U.S. Treasurys fell to 4.02%, its lowest since August.
The dip in yields, which have an inverse relationship to prices, is a good sign for property owners, but like the Fed’s announcement itself, isn’t yet cause for celebration.
“The recent decline in the 10-year treasury bond yield has generated a slight pickup in activity in some parts of commercial real estate, but a more sustained pick up in activity will not likely occur until after the Fed begins to cut interest rates,” Pohlad Cos. Chief Economist John Beuerlein told Bisnow by email.
UPDATE, DEC. 13, 8:27 P.M. ET: This story has been updated to include comments from Federal Reserve Chairman Jerome Powell, Taurus Investment Holdings CEO Peter Merrigan and Pohlad Investment Management Chief Economist John Beuerlein.
