Fed Cuts Interest Rates Again As Capital Markets Show Signs Of Life

The Federal Reserve cut its benchmark interest rate by 25 basis points Thursday, the second rate cut since the central bank began its 2022 campaign to tame inflation with rate hikes. 

“We continue to be confident that with an appropriate recalibration of our policy stance, strength in the economy and the labor market can be maintained with inflation moving sustainably down to 2%,” Federal Reserve Chair Jerome Powell said in a press conference Thursday.

The decision to cut rates again was unanimous among members of the Federal Open Market Committee.

The quarter-point cut leaves the target range for the federal funds rate between 4.5% and 4.75%. The Fed’s move was aligned with market expectations, and Powell reiterated the bank's plans to continue easing monetary policy through 2025. 

This week's meeting comes on the heels on Tuesday's historic presidential election that will return Donald Trump to the White House in January.

“In the near term, the election will have no effect upon our policy decisions,” Powell said. “Here we don't know what the timing and substance of any policy changes will be. We therefore don't know what the effects on the economy would be specifically, whether and to what extent those policies would matter for the achievement of our goal variables of maximum employment and price stability.”

Reporters asked Powell multiple questions during the press conference regarding the president-elect and his policy proposals as well as Powell's potential future in his role. He declined to answer except to say that he didn't believe the president had the authority to fire him and that he would not leave his job if Trump asked.

The Fed’s decision to shave 50 points off its benchmark rate in September sent a signal to investors that the regulator was pivoting towards monetary easing. Today’s move by the Fed is a continuation of that posture and a sign that the Fed is continuing toward the Goldilocks zone that is an economic soft landing.

Although Powell reiterated the Fed's plan to continue cutting rates in the new year, he declined to commit to a full percentage point in rate reduction in 2025. He indicated that although the job market is “in balance,” there is more work to do to get inflation under control.

The rate cuts are welcome news for CRE, although the impact at this point is more psychological than mathematical.

“I don't think anything the Fed does in November or December really unlocks anything for the market,” Trepp Chief Product Officer Lonnie Hendry told Bisnow. The Fed’s meeting is “a visual, psychological kind of morale boosting mechanism,” he said, but “it doesn't materially change the math and it doesn't materially change what I think CRE investors will do in the very short term.”

Abby Corbett, senior economist and global head of investor insights at Cushman & Wakefield, said fixed-rate debt offerings had gotten around 100 basis points cheaper than the year’s peak in April since the Fed began cutting rates. 

But investors and analysts don’t expect today’s cut to instantly be reflected in commercial real estate underwriting. After the September cut to the Fed’s benchmark rate, yields jumped on both five-year and 10-year Treasury bonds, which are used to benchmark underwriting for similarly dated real estate debt. 

The 10-year Treasury bond rate was 3.7% on Sept. 22, the day the Fed made the first rate cut of the cycle. Thursday morning, ahead of the meeting, the rate was 4.4%. 

While the Fed’s policy shift hasn’t entirely erased recession fears among investors — the likelihood of a recession in the next 12 months fell 5% to 15% in October, according to a Goldman Sachs forecast — it has satiated most concerns of a near-term crisis. 

“We're progressing through this capital markets recovery, but each incremental cut is like a progressive process, there's no watershed moment,” Corbett said. “We're in the recalibration and normalization process and so all of these are little nuggets that cumulatively help us transition.”

The elevated rate environment kept capital sidelined throughout much of 2024, but there are signs that the capital markets saw the Fed’s pivot as a signal to return to the market.

Dave Kelsey, co-founder of Hamilton Point Investments, said he has seen more buyers entering the market since the Fed’s initial rate cut, but he has yet to see transaction volume meaningfully improve. 

Still, his firm expects investors from small firms to institutional capital to come back in the near future, and it has put at least seven properties on the market since the Fed began cutting rates. 

His multifamily investment firm has acquired more than 32,000 apartments since its inception, typically for short-term hold periods, and Kelsey is actively in the market looking to make more purchases himself. Despite anxieties over a wave of debt maturities leading to a deluge of defaults, huge discounts and deep distress are hard to find, he said.  

“Peak pricing is down, but we don't see a ton of distress,” Kelsey said. “We see developers that are getting their equity out of the deal that they started two-and-a-half years ago. They're not losing money, but it's not fun, they’re not making any money either.” 

In the new year, Powell will have to navigate new policies under Trump, who first nominated Powell to his current position in November 2017 and who has campaigned on a protectionist platform of massive tariffs and corporate tax cuts. 

The proposals would total roughly $9T in tax breaks over the next 10 years, according to a TD Cowen analyst, while the tariff scheme would generate roughly $3.7T over the next decade, according to the Tax Policy Center. 

A lurching shift in fiscal policy would have profound impacts on inflation and unemployment rates, two indicators under the Fed’s mandate. Powell’s decisions over the next six months to a year will have to consider how likely Trump’s plans are to come to fruition and what that would mean for Fed policy. 

“The Fed is in a very difficult position, at least in the short term, trying to execute the soft landing” during a presidential transition, Hendry said. ”It's like you're running into some turbulence right as you're about to make the landing.”

UPDATE, NOV. 7, 2:30 p.m. ET: This story has been updated with comments from Federal Reserve Chair Jerome Powell.