Federal Reserve Says Economy In ‘Better Balance,’ But No Cuts Yet
The Federal Open Market Committee on Wednesday declined to pull the trigger on an interest rate cut, citing the need for more evidence the economy is moving in the direction it wants.
Fed Chairman Jerome Powell said during a press conference Wednesday that inflation is headed down, but it is too soon to say that the rise in interest rates has quelled it.
“We have six months of good inflation data,” Powell said. “Is that six months of inflation data sending us a true signal that we are in fact on the path, sustainable path, down to 2% inflation? The answer will come from some more data.”
Still, almost every member of the FOMC believes it will be appropriate to reduce rates eventually, Powell said.
“But the timing of that is going to be linked to our gaining confidence that inflation is on a sustainable path to 2%,” Powell said.
This was the fourth time in a row that the Federal Reserve stood still on rates, which rest at 5.25% to 5.5%.
Bayport Funding CEO Marcia Kaufman told Bisnow the Fed is right to hold off on rate cuts and that cutting might ultimately take longer than the market is anticipating.
“There aren't enough indicators that inflation is fully under control,” Kaufman said. “We're seeing some positive signs. But keeping rates flat for a while is probably the right thing to do.”
Cutting rates too quickly could revive inflation, she said.
“That's why I'm a little more conservative in my anticipation of cuts,” Kaufman said. “I think we're hearing too many people betting on interest rates coming down this year.”
The idea that rates will go down soon, which solidified after the December FOMC meeting, has already pumped up optimism in CRE, Alliant Credit Union Chief Capital Markets Officer Charles Krawitz told Bisnow Wednesday, ahead of the FOMC's latest decision.
“The outlook for real estate changed dramatically,” Krawitz said. “Transactional activity picked up considerably.”
CRE investor sentiment has significantly improved, according to CBRE. More than 60% of respondents to the company's U.S. investor intentions survey said they expect to purchase more real estate in 2024 than in 2023, up from 16% who said they would do so in 2023 compared to the year before.
The optimism is spread across investor types, with a higher percentage of developers, private equity funds, real estate funds and REITs all planning to buy more assets in 2024.
The Fed has hinted that there may be three rate cuts this year as inflation comes under control. In December, the consumer price index rose 3.4% year-over-year, still higher than the central bank's target of 2%. But December's 0.1% month-over-month drop in prices pointed to inflation easing.
Other economic indicators suggest a strong U.S. economy going into 2024, perhaps bolstering arguments against urgently lowering rates. Unemployment stands at 3.7%, and real wages grew by 0.8% in 2023, according to the Bureau of Labor Statistics.
The question now is whether any future cuts, regardless of timing, will make a difference to the most beleaguered sectors of the commercial real estate industry, especially office. The quick-step interest rate hikes beginning in 2022 compounded problems for the sector, which was already suffering from the impacts of remote work.
CMBS delinquencies rose nearly 1.5 percentage points in 2023 to 4.51%, Colliers reported, citing Trepp data, with office representing the most significant contributor to rising delinquencies. Nearly three-quarters of office CMBS loans are at risk of being unable to refinance this year.
The federal funds rate, which sets the pace for interest rates throughout the economy, is the highest it has been in more than two decades. The last time the rate was higher was in May 2000, when it peaked at 6.25% to 6.5%. In June 2006, not long before the Global Financial Crisis, the rate touched 5% to 5.25%.
UPDATE, JAN. 31, 5:17 p.m. ET: Comments from Jerome Powell and Marcia Kaufman have been added.
