In a much-anticipated decision, the Federal Open Market Committee (FOMC) left interest rates unchanged on Wednesday, maintaining the central bank’s discount rate between 5.25% and 5.5% for the eighth consecutive meeting. This move comes as inflation shows signs of cooling and unemployment rates rise, fueling industry optimism that interest rate reductions may be imminent.
Federal Reserve Chair Jerome Powell, speaking at a press conference in March 2024, had previously indicated his encouragement by the recent evidence of cooler inflation. "More good data would strengthen our confidence that inflation is moving sustainably toward 2%," Powell remarked earlier this month. The Fed's preferred inflation gauge, the personal consumption expenditures price index, rose 2.5% year-over-year in June, continuing a steady downward trend but still above the Fed's 2% target.
A Rosier Economic Outlook
The FOMC adopted a slightly more optimistic tone in its latest meeting, noting that job gains have moderated and there has been "further progress" toward the Fed's inflation target. The national unemployment rate, which has gradually ticked up to 4.1% in June—the highest since November 2021—reflects this moderation. "The Committee judges that the risks to achieving its employment and inflation goals continue to move into better balance," the Fed stated in its press release.
Despite the hint of optimism, the Fed maintained its cautious stance, reiterating from its June meeting: "The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent."
Balancing Act: Inflation vs. Employment
As the central bank continues to balance its dual mandate of stable inflation and maximum employment, rising unemployment could prompt the Fed to lower rates to guard against recession risks. Derek Tang, an economist at LHMeyer, emphasized that while the Fed remains committed to its inflation target, it can now afford to "spread its attention" to prevent the economy from cooling too rapidly and slipping into recession.
Industry Perspectives and Predictions
In the corporate world, optimism about the economic future is mounting. During Cushman & Wakefield's Q2 earnings call, CEO Michelle MacKay expressed confidence that much of the uncertainty surrounding interest rates and inflation is beginning to dissipate. She predicted that the Federal Reserve will soon cut rates, which will trigger a "waterfall effect" of transaction activity in the commercial real estate market.
"When the Fed cuts rates, which we believe will be soon, it will signal to the market that it's time to move into commercial real estate," MacKay said. "It's gotten better already in capital markets, and we expect some of the money on the sidelines to engage really quickly."
MacKay anticipates that while some assets may move immediately following a rate cut, a larger volume of completed transactions will materialize towards the end of this year and into early 2025 after a couple of rate cuts are in place. "The inflection point will be the first time the Fed makes a move," she said. "That will start to lead people into the right place to make decisions."
Looking Forward: The Shape of the Cutting Cycle
As the market looks ahead to potential rate cuts, understanding the frequency and long-term targets of these reductions will be crucial for setting longer-term yields. "As we get to the first rate cut, the focus of the committee will turn to ... what the shape of the cutting cycle looks like," Tang said. "The shape of the cutting cycle is really much more important for asset pricing, whether it's real estate or stocks or so on."
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