The Federal Reserve stands at a juncture as it deliberates on its interest rate policy for 2024. The Fed faces the delicate task of balancing a seemingly robust economic recovery against inflationary pressures that appear to be subsiding.
Interest rates were left unchanged at a range of 5.25% to 5.50% by the Fed at its policy meeting earlier this month. Interpreting Fed comments after the meeting, markets anticipate rates are likely at or near their peak, and could be cut in 2024 if inflation continues to fall towards the Fed’s 2% target.
Barring surprises in economic forecasts (which drives Fed policies), collective wisdom is looking for rates to hold steady through the first half of ’24, and begin a first step in declines in Q3. (We note, coincidently, that this will be the time for the major ramp-up to the election.)
All of this sparks hopes the CRE market may finally move on from its wait-and-see approach that has stymied deal flow throughout much of the past year. The Fed has made substantial progress in slowing the rate of inflation, with CPI by government measurements being only 1% above the Fed’s target. Assuming the Fed continues their pause, investors are preparing to step back into the market as cap rates are expecting to fully top out (prices bottom) in 2024, especially (when / if ?) the Fed begins dropping serious hints at lowering rates.
There are credible sources interpreting Fed comments forecasting continuing rate pauses or declines, or even further increases, from January to December of ’24. But one thing is fairly certain: Buyers and sellers will come off the sidelines once the direction of rate movement becomes more certain, which will boost sales volumes in 2024 relative to 2023. We know that markets move in anticipation of a clear horizon, not after the anticipated event, so expect sales and lending activity to begin ahead of actual Fed rate movement.
If economic data continues to support a lowering-of-inflation scenario as the year progresses, we expect to see market driven interest rate reductions which will be beneficial to financing real estate, either for acquisition or re-fi’s. The Fed is leaving the door open a crack for interest rate increases, and while collective wisdom doesn’t expect that will be needed, it’s still on the table at this time.
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Going into 2024, interest rate policy remains contingent upon a multitude of variables, making concrete predictions difficult. Employment figures, consumer spending patterns, and business investments will be at the forefront in determining the pace and magnitude of interest rate adjustments. A robust labor market recovery coupled with sustained consumer and business confidence might prompt a quicker normalization of interest rates. However, domestic as well as global economic and political factors may also come into play. The Fed will consider how international events, trade dynamics and geopolitical issues might influence domestic economic conditions and, consequently, the interest rate trajectory.
The growth/recession story will be the determining factor for Fed policy, but beware the black swans: 2 wars in progress, bad actors stirring the pot (Russia, China, North Korea, Iran, and their terrorist support groups, e.g. Hamas, Hezbollah and Houthi rebels), natural disasters, and not to overlook that ’24 is an election year. Activities from any of these areas can potentially dictate interest rate movements, even without Fed actions.
As we enter the new year, there are still challenges to finding debt capital. Many banks have been, and are still, out of the market. We’re seeing lower LTVs and higher debt coverage ratios restricting leverage available to real estate buyers and refinancers. Despite what the Fed says, however, there is still a capital need and funding available – the terms, however, may be challenging. Uninvested capital is at a record high, looking for value-adds, e.g., distressed properties.
The Fed’s ability to respond adeptly to evolving economic conditions while maintaining stability will play a key role in shaping the course of the U.S. economy and global financial markets. For now, all eyes remain fixed on the Fed, awaiting cues that will influence the path of borrowing costs, economic activity and dealmaking throughout 2024.