Moody's Economist Says December Fed Rate Cut 'May Not Be The Most Prudent'

While the U.S. Federal Reserve is widely expected to cut interest rates by another 25 basis points next week, Moody’s economists are warning that a more cautious approach may be necessary.

After inflation accelerated in November and the nation posted another month of strong job growth, a cut next week "may not be the most prudent monetary policy action," Ermengarde Jabir, Moody’s director of economic research, said in a statement.

“The trajectory of recent cuts, starting with September’s 50 bps cut, may be risky and aren’t reflective of macro-economic conditions such as low unemployment and strong GDP growth,” she said.

The Federal Open Markets Committee cut interest rates by another 25 bps in early November, bringing its target range to between 4.5% and 4.75%. 

While short-term data fluctuations shouldn’t dictate long-term strategy, Jabir said, the metrics used by the Fed to gauge inflation have been stubborn in recent months.

The Fed’s preferred measure of inflation, the personal consumption expenditures index, is still above the 2% target set by the Fed. PCE was 2.3% higher this October than a year earlier, with the Bureau of Economic Analysis set to release November’s PCE numbers two days after the Fed’s next meeting on Dec. 18.

Another important measure for the Fed, the Bureau of Labor Statistics’ consumer price index, jumped by 0.3% in November, an annual increase of 2.7%.

Jobs data, meanwhile, also stayed strong. The U.S. added 227,000 jobs in November, with the unemployment rate remaining steady at 4.2%. 

But inflation continues to impact the economy, Jabir said. Keeping interest rates higher for longer has helped lower inflation but has not yet resulted in the Fed hitting its target, revealing the difficult balancing act between short-term discomfort and long-term economic stability. 

“Inflation is creating a downdraft for parts of the economy, including pockets of commercial real estate,” she said. “Nuances in consumer behavior, especially in discretionary spending, are revealing trade-offs, such as in self-storage, where high inflation impacts household budgets.”

Capitalization rate spreads are “now perhaps over wide” as the market adjusts to underestimated risk premiums and the creep of rising geopolitical tensions, she said. And while other central banks may be eyeing rate cuts, strong economic growth in the U.S. may mean that America should consider a different approach, she said.

If another rate cut is implemented, it’s the multifamily sector that stands to gain the most, Moody’s Head of CRE Economic Analysis Kevin Fagan said.

Lenders are still cautious about office, but they are taking the opposite approach when it comes to multifamily because of high interest rates' upward pressure on previously low multifamily cap rates, he said.

“This dynamic sets the stage for a more favorable borrowing environment within the multifamily domain, which is also set to benefit in 2025 from near record apartment absorption, underscoring a clear divergence in how the Fed’s easing impacts segments of real estate," Fagan said in a statement.