In late 2023, multiple write-ups and articles predicted a modest deterioration of economic conditions, slower job gains and an overall “soft landing” or “mild recession” for 2024. Multiple reports also noted that the Federal Reserve would have three Effective Federal Funds Rate (EFFR) cuts.

Fast-forward six months, and no mild recession has occurred, nor have the anticipated interest rate cuts. Connect CRE reached out to experts for their analysis of the first half of 2024 and to answer whether the Fed will back off its current interest rate strategy.

The First Half – Expectations and Surprises

Most experts reported that the past six months have aligned with most economic forecasts.

“The first half of 2024 matched our expectations very well,” said Ryan Severino, chief economist and head of U.S. research with BGO. “We thought the economy would slow and support space market fundamentals.” Perryman Group President and CEO Ray Perryman agreed, pointing out that “overall performance has been pretty much in line with our forecast.”

Still, there were a few surprises. Perryman said continued inflation wasn’t expected, while Omar Eltorai, director of research with Altus Group, acknowledged that he anticipated more weakness in overall consumer spending. “I underestimated investor appetite for public securities and remain perplexed by the high concentration of broad equity indices, the implied earnings growth expectations for these companies and ultimately investors’ willingness to pay for these future earnings.”

Meanwhile, the job market outperformed all expectations, with more than 1.2 million jobs added in the first five months of 2024, “outpacing the full-year forecasts of many economists,” said Radix Chief Economist Jay Denton. That job growth was necessary, he added, due to increased levels of new multifamily supply. Even with sluggish rent growth, “there has been enough job creation to keep occupancy steady at close to 94% since the beginning of the year,” Denton added.

On the real estate side, Eric L. Enloe, senior managing director with Partner Valuation Advisors, said that an anticipated rebound in transactions hasn’t yet happened, though “some positive trends in industrial and multifamily exist.” Stephen Buschbom, research director with Trepp, added that while the increase in the CMBS delinquency rate was expected, the private-label CMBS issuance was stronger than anticipated, “largely driven by single-asset, single-borrower transactions,” he explained.

The biggest surprise was the Federal Reserve’s continuation of its higher-for-longer policies. “The general market consensus at the end of 2023 was for rate cuts to begin by mid-2024,” Buschbom said. “We’re obviously bumping up against that now, and it looks like the first cut could be in the fall.”

What Does the Fed Say?

With apologies to Ylvis and its 2013 hit about the fox and its commentary, recent Bureau of Labor Statistics numbers are generating fresh questions about what the Federal Reserve might say (or do) at the upcoming Federal Open Market Committee meeting, which will occur July 30-31. The CPI numbers released on July 11 seem promising, with the all-items index increasing by 3% year over year and the CPI for All Urban Consumers dropping by 0.1% month over month.

But anyone anticipating immediate EFFR cuts might want to take a pause. The experts suggested that a cut—or cuts—could still take place in 2024, but possibly not immediately. Though Severino pointed to a slowdown in the current economy and a reduction in inflation, “we did not expect the Fed to cut before the latter part of this year, at the earliest, and that still feels right,” he said.

Denton explained that with four meetings remaining in 2024, the question as to immediate cuts is iffy. The current data, while positive, might not be enough to sway the Fed to immediate action. “The November meeting happens two days after the election, and most think that date will be avoided due to political issues,” Denton said. If there are any cuts, they’ll occur either in September or December, he added.

Chandon Economics’ Vice President and Head of Research Jonathan O’Kane explained that the late-June markets anticipated a three-in-five chance of rate cuts by September and a greater than nine-in-ten chance of a cut before the end of the year. However, “If the GDP is robust in Q2 as the Atlanta Fed currently forecasts at 2.7%, I’d expect the can to get kicked down the road a little further,” O’Kane said. He added that the odds are that the Fed will make a move this year “but not by much.”

Perryman also pointed out that until there was more clarity, the Fed would continue its wait-and-see course. “Having said that, I expect at least one interest rate reduction this year and believe there will be opportunities for more,” Perryman said.

Buschbom said that if there isn’t a considerable inflation uptick – and disinflation continues – the Fed’s current stance could gradually ease over the next few months as long as job additions cool down.

Enloe, who anticipated that the Fed would likely make one 25 basis point cut before the end of the year, also pointed out that the EFFR isn’t the only thing to watch. “We’re also keeping an eye on the 10-year Treasury yields, which have come down 50 basis points since April, despite the Fed’s lack of activity,” he said.