December Fed Meeting Update
High-Level Recap
The Federal Reserve on Wednesday announced its third consecutive interest rate cut of 2024, reducing its benchmark rate by 0.25 percentage points, largely inline with what investors were expecting at the meeting. While downward moving rates bode well for lowering CRE lending costs, its likely the bond market and lending rates had largely baked in December’s move prior to the meeting. The most important storyline that emerged from the meeting is a potential pause in interest rate cuts at the next several Fed meetings.
Source: Federal Reserve
What Economic Data Points Towards “Higher-For-Longer”
Many experts are drawing attention to last month’s BLS data release, which upwardly revised October’s job growth figure by 12,000 jobs, and reported November job gains 13,000 jobs ahead of expectations. This pace of job growth is down from peak levels recorded in 2021 and 2022, but still higher than the Federal Reserve would have expected given the restrictive level interest rates are at. It is important for investors to remember the Fed began raising rates to cool the economy and fight inflation. If economic data like job growth, wage growth, and corporate profits continue to come above expectations, the incentive to cut rates quickly is reduced.
At the same time, recent inflation data suggests CPI is showing signs of “stickiness” above the 2% level. While 3% inflation is aligned with ECB standards, the U.S. federal reserve still views this level as problematic and will struggle to justify more rate cuts in 2025 if CPI and PCE reading continue to come in at current levels.
This puts CRE markets in a unique situation. Typically, strong employment growth and economic confidence drive performance improvements, making real estate assets more appealing to investors. This will still hold true in 2025, but if an owner was banking on lower interest rates ahead of a debt maturity they extended, growth and economic confidence are not what they want to see. Investors that are well positioned financially appear poised for a strong year in 2025, but those that were waiting for a rapid reduction in interest rates will likely face unforeseen hurdles.
What Could Make The Fed Cut Rates More Rapidly
Many consumers and firms felt an increase in optimism about 2025’s outlook following the presidential election, something which has sparked a general movement of investment capital away from typically safe assets like gold and treasuries into equities, crypto, and other growth-orientated investments. Consumer confidence will be a key indicator for investors to track over the course of 2025. Preliminary readings for December continue to show significant upward movement, supporting the argument for a slowdown in Fed action.
Source: University of Michigan
Another sign the Fed may act more aggressively would be a climb in the unemployment rate to the high 4.0% range. The Sahm-rule is generally a useful tool for discovering when a rise in unemployment is significant, and even though it delivered a false positive earlier in 2024, if it triggers again the Fed would likely be forced to speed up its rate path.
When Will Rate Cuts Begin To Appear In Lending Rates
While the impact of December’s rate cut was largely already baked into treasury yields and lending rates, the next several meetings have less certain results and could lead to more variance in rates following decision announcements. As of December 18th, Wall Street is placing just a 9.6% likelihood we see another rate cut in January. The current bet is the Federal Reserve will slow the pace of the cuts, with many experts projecting the Fed to take an “every other meeting” approach during the front half of 2025.
Another factor impacting treasury rate paths is debt issuance. The more treasuries the Fed sells in the market, the higher the expected yield will rise. This is because the overnight rate is not the only factor impacting long-term treasury yields, and typical supply and demand dynamics play a role in setting the yield rate. If the government continues increasing its debt issuance, interest rates will move down less slowly than the overnight rate for the considerable future.
Many experts believe the 10-Year yield will settle somewhere near or just above 4.0% during the first part of 2025, but even a small surprise from the Fed or new economic data could shift that analysis. The 1-month SOFR has been particularly volatile to close 2024, highlighting why tracking macroeconomic trends is especially important when the economy is transitioning from one cycle to the next.
Source: Chatham Financial
