Cooling Inflation Report Boosts Optimism For 2024 Rate Cuts

A key metric of inflation declined last month and is nearing the Federal Reserve's 2% year-over-year target, boosting the market's optimism that interest rates will begin to come down in the first quarter. 

The personal consumption expenditure price index fell by 0.1% from October to November, the largest decline since April 2020, and rose 2.6% year-over-year, The Associated Press reported.

In response, traders began boosting bets that the Fed would begin to cut rates in March and keep bringing them down throughout the year, Reuters reported. 

The Federal Open Market Committee has kept rates steady at 5.25%-5.5% at its last three meetings, and most members at this month's meeting predicted rate cuts of at least 50 basis points next year. 

With the potential for rates to come down next year, some experts say that the sector will see a significant bump in activity. Outgoing Morgan Stanley CEO James Gorman told The Financial Times that the historic rate increases have put a damper on capital markets deals, but that could soon change. 

“The minute the Federal Reserve has concretely signaled that they’ve stopped raising rates, let alone the point at which they first do a rate cut, these markets will take off,” he said. “And we are right in the center of where that action is going to be.”

This week, the benchmark 30-year fixed-rate mortgage dropped to a six-month low of 6.67%, down from 7.79% in October, the AP reported.

After a November report that showed cooling inflation, real estate stocks outperformed the S&P 500 and rose by 5.3%, signaling investor optimism about the sector.

While the forecast is improving for the commercial real estate industry, experts told Bisnow last week that it may take time for the market to thaw after rates begin to come down, as property valuations remain murky and there is still a gap between buyer and seller expectations.