Today’s post is written by Michael Green, Senior Commercial Loan Originator with Counsel Mortgage Group, LLC. Mike writes monthly on the commercial mortgage market. Check back each month for his commentary.
The Federal Reserve delivered a widely expected quarter-point rate cut 2 weeks ago, lowering its fed funds benchmark range to 4.00% – 4 ¼% after Chair Jerome Powell signaled last month that the central bank would tilt toward responding to employment risks rather than lingering inflation concerns. The Prime Rate is now 7 ¼%.
The move, however, uncovered divisions within the FOMC. Newly-appointed Fed Governor Stephen Miran dissented, pressing for a deeper ½ point cut, while Governors Christopher Waller and Michelle Bowman – who had previously argued for easing – joined the majority this time. Updated projections suggest another 50 basis points of easing by year-end, likely through two 1/4 point reductions, taking rates to 3 ½% –
3 ¾% notably below last June’s forecast.
The cut underscores expectations that the Fed has entered into a more accommodative phase, but the rationale – weakening labor market data – raises questions about the durability of economic growth. Stock and bond markets are likely to interpret the decision as supportive for risk assets in the near term, with cheaper financing conditions boosting investor enthusiasm. However, the Fed’s projections—unemployment rising to 4 ½%, core inflation at 3.1% in 2025, and only returning to 2% in 2028—suggest a slow glide path to stability. We expect Treasury yields to remain under pressure (firm-to-rising), steepening the curve as economic growth risks mount.
Says Bryan Jordan, chief strategist at Cycle Framework Insights, “A contracting labor market would very likely mean a recession in the economy at large, so there is a bit of urgency in this action. Inflation pressures remain a concern, but the labor market is the greater near-term risk.”
CRE Impact
For commercial real estate, the cut is expected to deliver more of an immediate psychological lift than a financial one, signaling a positive shift in market sentiment. However, interest rates moving lower because of a weakening economy, higher unemployment, and slower wage growth is problematic forecasting a negative impact on rent growth.
Credit Market Dynamics
Private lenders point out that competitive dynamics are already shaping borrowing conditions. We don’t expect any immediate impact on borrowing conditions for new direct loans on commercial properties. Competition among private lenders is already putting slight downward pressure on interest rates. Floating-rate borrowers and those refinancing maturities will see incremental relief. Innovative structuring remains key to bridging risk-reward expectations. It’s not just the rate … it’s terms and conditions.
From a lender’s perspective, the cut could stimulate deal activity. Lower interest rates will allow for higher debt service coverage, which will allow for more leverage, or reduced lender risk at historical ratio levels. Historically, when the Fed starts changing rates in either direction it has resulted in 6 cuts (1/4 point each) over a year-and-a-half. This first cut (actually, the 2nd in this round of cuts) should message a continuing declining trend to the market and spur increased transaction activity.
The broader message is more complex: easing into a weakening economy carries as many risks as rewards. With unemployment projected to rise and inflation only slowly converging toward the Fed’s target, the central bank’s actions may support confidence in the short term but leave questions about the durability of economic growth unresolved.
Investment markets are discounting mechanisms. We look at financial history to find trends and identify cause-effect relationships. Investors buy the real estate – bricks-n-boards – but success is reflected in the numbers. Adding appropriate leverage is a critical component to the success of the acquisition.
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