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After a Pause, What Next? – Dec. 18, 2023

The Federal Reserve last week announced that it would maintain its benchmark interest rate at a range of 5.25% to 5.50%, marking the third time in a row it has done so. The widely expected continuation of the Fed’s pause on rate action, and the central bank’s implied downward trajectory for the federal funds rate in 2024, can be seen as both positive news and a not-entirely-positive forecast for next year.  

On the plus side, consider what the Fed’s actions—or inactions—say about the health of the economy. In a special report, Marcus & Millichap noted that December’s pause cemented 2023 as “a more cautious year for Fed decision-making, with the fed funds rate noting a 100-basis-point total increase compared to 2022’s 425-basis-point leap.” 

And as noted in Connect CRE’s sister publication Connect Money, the central bank is now looking toward partly reversing the rate hikes in 2024. “Fed officials’ rate projections, or dot-plots, were dovish, with the median dot-plot suggesting 75 basis points of interest rate cuts in 2024,” Connect Money reported.  

Five Fed officials think we’ll see 100 bps of interest rate cuts next year, reported Connect Money. In a note to investors, ING Economics’ James Knightley predicted no fewer than six rate cuts in 2024 and as many as four more in 2025, according to Business Insider. This would bring the effective federal funds rate to about 3.83% at the end of 2024 and to 2.83% at the end of 2025. 

That change in direction has favorable implications for commercial real estate. “This is a start, and definitely promising news for every tentacle in the real estate world,” said multifamily developer Delisa Guerrier of Guerrier Development. “Hopefully this news will make buyers confident enough to set their sights on buying again, banks to open up for business again and for the investment community to begin sharpening their pencils – because if this had gone the other way, the consequences would have been dire. I’m glad to see that the Feds are taking action.” 

Already, said Marcus & Millichap, “the more dovish positioning by the Federal Reserve immediately translated to a significant decline in the 10-Year Treasury rate, which should support investor activity.” 

However, there’s also the question of what rate cuts say about the broader economy. “We have modest growth and cooling inflation and a cooling labor market — exactly what the Fed wants to see,” Knightley wrote. “This should confirm no need for any further Fed policy tightening, but the outlook is looking less and less favorable.” 

Does a slower growth rate and cooling jobs market signal a recession in our future? Maybe not. Connect Money reported that among members of the Federal Open Market Committee, “median inflation expectations for 2024 and 2025 are decreasing, but unemployment forecasts remain unchanged, showing Fed members’ greater confidence in their ability to moderate price increases without causing significant job losses.” Stay tuned. 

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About Paul Bubny

Paul Bubny serves as Senior Content Director for Connect Commercial Real Estate, a role to which he brings 16-plus years’ experience covering the commercial real estate industry and 30-plus years in business-to-business journalism. In this capacity, he oversees daily operations while also reporting on both local/regional markets and national trends, covering individual transactions across all property types, as well as delving into broader subject matter. He produces 7-10 daily news stories per day and works with the Connect team and clients to develop longer-form content, ranging from Q&As to thought-leadership pieces. Prior to joining Connect, Paul was Managing Editor for both Real Estate Forum and GlobeSt.com at American Lawyer Media, where he oversaw operations at both publications while also producing daily news and feature-length articles. His tenure in B2B publishing stretches back into the print era, and he has served as Editor in Chief on four national trade publications. Since 1999, Paul has volunteered as the newsletter editor of passenger rail advocacy groups (one national, one local).