Federal Reserve Holds Rates Steady, Signals One Cut In 2024 As CRE Grows Increasingly Impatient

The Federal Open Market Committee held interest rates steady Wednesday, marking the seventh consecutive meeting where it kept the central bank’s discount rate between 5.25% and 5.5%.

The Federal Reserve signaled just one rate cut is coming before the end of the year, a significant departure from the three cuts it anticipated in March. Seven FOMC members said they think one interest rate cut this year is appropriate, with four saying they anticipate no cuts, according to materials released Wednesday, following the body's two-day meeting. Eight other members said two cuts would be the proper course of action.

Fed Chair Jerome Powell said during a post-announcement press conference that it will take time for the central bank to get the confidence it needs to loosen fiscal policy. Overall economic data will guide decision-making, he said. 

“Rate cuts that might have taken place this year take place next year,” Powell said. “There are fewer rate cuts in the median this year, but there's one more next year. So really, if you look at year-end 2025 and ‘26, you're almost exactly where you would have been, just it's moved later. ... We'll have to see where the data light the way.”

The committee projects four cuts in 2025, four more in 2026 and two additional drops after that, until the rate settles at a long-run interest rate of 2.8%, which policymakers estimate as the “neutral rate” that is neither stimulative nor restrictive. This long-run rate of interest moved up to 2.8% in June from 2.6% in March.

The result was widely anticipated by economists, especially given recent inflation data. The most recent consumer price index showed that prices ticked up 3.3% on an annualized basis in May, but the slowdown in inflation sputtered in the first three months of 2024. Those results stymied investors' hopes that the Fed could assertively cut rates.

But it still came as a blow to commercial real estate players, who have been banging the table for the Fed to reduce rates and ease tensions in a tough financing environment. 

“The question for real estate is how much longer can investors hold out?” said Derek Tang, an economist at LH Meyer. “If you're going through it for, let's say, a couple of years, then maybe people are able to delay things a little bit. Maybe they have a little cushion they can depend on, they can move other things around in their portfolios. But if this is going to be a longer-term trend, then we're going to need some permanent solutions.”

The central bank outlined in a statement that there has been “modest progress” toward its 2% inflation objective but that it doesn’t expect to reduce rates until it has “gained greater confidence that inflation is moving sustainably” in that direction. Powell said high rates have had a significant impact on housing, and the Fed’s best remedy is to slow down inflation. 

“The best thing we can do for the housing market is to bring inflation down so that we can bring rates down so that the housing market can continue to normalize,” Powell said.

U.S. CRE stocks weren’t significantly moved by the rate news. REITs in the FTSE Nareit U.S. Real Estate Index were up 1.2% as of 3:15 p.m. ET Wednesday.

“Markets are always forward-looking,” said Nancy Vanden Houten, lead economist at Oxford Economics. “If they begin to become more confident that the Fed is truly about to embark on this path of steadily lowering rates, I think we'll see the impact on mortgage rates sooner than, say, the federal funds rate.”

Elsewhere across the globe, other financial arms are beginning to loosen their grips, albeit slightly. The Bank of Canada trimmed its key policy rate last week for the first time in four years. The European Central Bank followed suit a day later, making its first interest rate cut since 2019.

The labor market in the U.S. continues to perform, with the Bureau of Labor Statistics reporting that the U.S. economy added 272,000 jobs in May, beating consensus expectations. 

But other parts of the domestic economic landscape are clouding the Fed’s decision-making, Ryan Severino, chief economist and head of U.S. research for BGO, said in a release. 

“While our modeling still suggests that the Fed could cut later this year, it does not have infinite time on its hands, especially as we see more evidence of slowing in the US economy,” he said. “But letting other central banks cut first affords it the ability to watch and see what happens, which could provide it with more evidence and greater confidence to cut rates later this year.”