In a surprising move, the Federal Reserve’s Federal Open Market Committee announced on Wednesday that it would be cutting the federal funds rate by half a percentage point to a range of 4.75% to 5.00%. This marks the first interest rate cut since March 2020 and is a significant shift in strategy for the central bank, which had maintained its key interest rate at its highest level in over two decades for fourteen months leading up to this decision.
The main reason behind this change is due to inflation approaching the Fed’s target of 2%, causing policymakers to focus more on improving job market conditions rather than fighting inflation. However, while there may be additional cuts throughout the rest of this year, with only half-point reductions expected according to committee projections, it seems that they do not believe there is an immediate risk of collapse in employment.
“The (Fed) has become more confident that inflation will reach our goal sustainably and believes that risks related both our employment and price stability goals are balanced,” stated their official statement. “While economic outlook remains uncertain, we are closely monitoring potential risks from both sides.”
As part of their new summary report on economic projections released alongside this announcement (known as dot-plots), expectations were lowered compared with previous estimates made by market analysts: The median dot-plot projection for rates was reduced from an estimated average increase reaching up until now at around five percent down towards four-and-a-half percent during fiscal year ending December ’24; followed subsequently thereafter into three-and-three-quarters percent during fiscal years ending December ’25; then finally dropping further still into three-percent territory come end-of-fiscal-year period concluding December ’26.
However not all members agreed with these decisions – Governor Michelle Bowman voted against her colleagues’ recommendation preferring instead just twenty-five basis points reduction – breaking FOMC’s streak unanimous votes since June ‘22 when last time such dissent occurred within committee ranks among voting members.
Prior to this decision, interest-rate futures indicated that there was a greater than 50% possibility of a half-point cut rather than the typical quarter-point change. Overall rate-cut estimates have risen since the last FOMC meeting, with an additional 60 basis points expected to be cut by the end of fiscal year ’25 and significant emphasis on cuts in fiscal year ’24.
Commercial real estate leaders also weighed in on this news and its potential implications. “After more than five cycles without any changes, we welcome this interest rate reduction from Federal Reserve as good news for our industry,” said Harry Klaff, principal and U.S. president at Avison Young.
He continued by saying: “Investors who have been patiently waiting for market conditions to improve before making significant investments will now see opportunities arise due not only because rates are lower but also because prices across all asset classes are resetting themselves – sparking renewed activity throughout commercial real estate industry later into next year.”
Chris Jackson CEO NAI Capital Commercial based out Los Angeles provided mixed forecast regarding what impact such move would likely bring about; stating: “The economy is starting show signs strain which may temper initial enthusiasm around lower rates,” he said adding further that “We don’t expect major impacts until later during current calendar-year or early within following one when these cuts could potentially reach up towards one percent.”
In terms of transactions front however Mr.Jackson predicted owner-occupied buildings being among first properties seeing faster sales alongside various types investment properties along with developers beginning new projects come next calendar-year as conditions continue improving still further yet again even beyond then too according him anyway so far it seems like lenders already offering variable-rate loans anticipation future reductions over coming months ahead though no other major shifts their approach anticipated either way regardless how things ultimately play out going forward from here onwards says Ryan Moore co-founder Last Mile Investments whom welcomed Fed’s decision saying consumer has been hit hard both inflation higher interest rates some time now which is rare combination so glad see both going right direction finally.
Meanwhile at National Association Realtors, chief economist Lawrence Yun issued statement focusing on implications residential market: “Fed’s half-point rate cut decision marks beginning six-eight rounds further cuts well into ’25,” he said. “Next one will occur after presidential election as justification for this move was due to cooling inflation recent months and slower job growth.”
“Mortgage rates have already anticipated Fed’s likely path,” he continued. “That’s why 30-year rate has dropped by 150 basis points since earlier this year until today, with any additional declines expected to be minimal.”
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