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.
Considering inflation … U.S. businesses ended 2025 with their most subdued inflation outlook of the year, according to new data from the Federal Reserve Bank of Atlanta’s December Business Inflation Expectations Survey. Firms’ year-ahead inflation expectations held steady at 2.2%, matching November’s reading and marking the lowest level recorded in 2025 – an encouraging signal for policymakers seeking confirmation that inflation continues to decelerate.
The December report showed a notable improvement in business conditions. A growing share of firms reported sales levels and profit margins above normal, suggesting the economic backdrop is firming even as price pressures cool. Many respondents pointed to resilient customer demand, improved inventory management, and easing supply constraints as key drivers of better-than-expected performance in Q4-25.
On the cost side, companies reported unit cost growth of 2.4% year-over-year, modestly higher than in prior months but still well below post-pandemic peaks. Wage pressures remain elevated in certain sectors – particularly services – but the survey indicates that firms are no longer experiencing broad-based cost surges. Several respondents noted stabilizing input prices, improved shipping and logistics costs, and normalization in supplier lead times.
Crucially for the Federal Reserve, long-run (5-to-10 year) unit cost expectations fell to 2.7%, down from September’s reading. That decline suggests firms see inflation risks continuing to drift lower over time, reinforcing the Fed’s view that inflation expectations remain well anchored despite lingering price stickiness in housing and services, and above their 2% advertised target rate.
Taken together, the survey paints a picture of an economy transitioning toward moderate but sustained inflation with improving profitability—a combination that may give the Fed more flexibility as it evaluates the timing and pace of interest-rate cuts in 2026.
And on the labor front … The Bureau of Labor Statistics released a highly mixed employment report last month, offering markets both reassurance and renewed concern as policymakers assess where monetary policy goes next. But sending out conflicting signals, payroll growth surprised modestly to the upside, while the unemployment rate unexpectedly rose from 4.4% to 4.6%, an uncomfortable signal for a Federal Reserve already shifting its focus toward labor-market risks.
The U.S. added 64,000 jobs in November, modestly beating expectations for a 45,000 gain. The October rate, however, was revised to a 105,000 decline, driven entirely by a sharp drop in government employment.
Revisions (You seldom see these.) once again darkened the recent trend. August payrolls were marked down by 22,000, from a 4,000 loss to a 26,000 loss, and September by 11,000, from a 119,000 gain to 108,000, leaving employment for those two months a combined 33,000 lower than previously reported.
Government employment fell by another 6,000 in November after a 162,000 plunge in October tied to federal workers exiting under a deferred resignation program, leaving federal payrolls down 271,000 (about 12.9%) from their January peak. Wage pressures also eased: average hourly earnings rose just 0.1% on the month, or $0.05, to $36.86, and 3.5% year on year versus 3.6% expected, even as the average workweek inched up to 34.3 hours.
And so, for the Fed, the report broadly reinforces the message from the December FOMC meeting, where Chairman Powell adopted a more dovish tone and underscored rising risks to employment rather than inflation. Powell flagged what policymakers see as a persistent 60,000 per month overcount in nonfarm payrolls, suggesting headline gains may be overstating underlying momentum. With unemployment creeping higher, wage growth cooling, and labor demand softening, the latest data strengthen the case for the Fed to tilt toward additional easing in 2026, unless inflation meaningfully accelerates.
The Fed’s primary mission per the Federal Reserve Act is to provide for stabilized prices and maximum (optimal) employment. The current environment is, and has been for some time, at odds to satisfy both of these criteria. Last December the Fed showed that it is choosing employment – the battle to fight – and a softly sinking economy over inflation.
Where the bond and credit markets are concerned, we’ve seen a decline in rates out to about 3 years, while intermediate and long-term rates have held firm or increased, with increased volatility throughout. The 10-yr. Treasury – the traditional bell weather for CRE rates – closed at 4.14% on Dec. 11, the day after the Fed reduced the fed funds rate ¼%. Today, Jan. 12, it closed at 4.18%.
Take-aways: The Fed is expected to reduce rates another ½ point by mid-year. Chairman Powell will likely be replaced when his term is up in May, by an appointee in agreement with Trump’s desire to reduce rates further and faster. A new chapter of global political intrigue has just begun, and will manifest new opportunities and challenges. And yes, BTW, it’s an election year!
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