The Federal Reserve’s Federal Open Market Committee on Wednesday slashed the federal funds rate by a half percentage-point to a range of 4.75% to 5.00%. The first interest rate cut since March 2020 represented a reversal in strategy for the central bank, which had held its key interest rate at a 23-year high for 14 months prior to Wednesday. 

With inflation approaching the Fed’s target of 2%, policymakers are pivoting away from fighting inflation to the job market. However, the central bank anticipates only a half point in additional rate cuts for the rest of the year, indicating that the committee does not believe the job market is in imminent danger of collapsing. 

“The (Fed) has gained greater confidence that inflation is moving sustainably toward 2%, and judges that the risks to achieving its employment and inflation goals are roughly in balance,” the Fed said in a statement. “The economic outlook is uncertain, and the Fed is attentive to the risks of both sides of its dual mandate.” 

In its new summary of economic projections, the Fed’s dot-plots fell to meet market expectations, with the median dot-plot for 2024 reduced to 4.37% from 5.125%, the 2025 cut to 3.375% from 4.125%, and 2026 from to 2.875% from 3.125%. 

Not all policymakers agreed with the decision. Governor Michelle Bowman voted against the other 11 members of the committee, preferring a lower 25-basis-point cut, breaking the FOMC’s streak of unanimous votes for the first time since June 2022. 

Prior to the decision, interest-rate futures indicated that there was a greater than 50% possibility of a half-point cut rather than the typical quarter-point change. Overall rate-cut estimates have risen since the last FOMC meeting, with 60 basis points of cuts added by the end of 2025, with a significant emphasis on 2024. 

Commercial real estate leaders weighed in on the reduction and its implications. “Today’s cut in rates will undoubtedly inject some much-needed optimism into the commercial real estate market,” said Gino Sabatini, head of investments at W. P. Carey. “Lower rates will translate to cheaper financing for new acquisitions, fueling increased investment activity. It will also boost investor confidence as it signals that inflation has cooled, which should in turn help the market stabilize and further narrow the bid-ask spread between buyers and sellers.”

Ari Rastegar, founder and CEO of Rastegar Property Company, concurred. “The Fed’s first rate cut in four years is a critical step for the commercial real estate market, which has been paralyzed for too long,” he said. “While it’s not a cure-all, it’s a powerful psychological signal that could break the market’s stagnation. Investors have been hesitant, holding back due to uncertainty, but today’s decision might finally shift that mindset. The hope is that we’re turning a corner, where deals can start moving again, helping to restart the real estate recovery and stabilize our broader economy.”

On the brokerage side, Harry Klaff, principal and U.S. president, Avison Young, applauded the decision. “After more than five cycles of unchanged rates, the Federal Reserve’s interest rate reduction is welcome news to the commercial real estate industry,” said Klaff.

He continued, “Resourceful investors have been patiently keeping significant capital on reserve – carefully monitoring the market and prices of premier assets within the industrial, multifamily and retail sectors. The rate cut combined with pricing resets across all asset classes will spark activity and investor interest throughout the commercial real estate industry later this year and into 2025.”   

From Los Angeles, NAI Capital Commercial CEO Chris Jackson provided a mixed forecast on what the reduction will mean. “The economy is starting to show signs of strain, which may temper initial enthusiasm around lower rates,” he said. “We don’t expect significant impact until later this year or early next year, when rate cuts could reach up to 1%.” 

On the transactions front, Jackson predicted, “Owner-occupied buildings will likely see faster sales, alongside various types of investment properties. We also anticipate that developers will begin new projects next year as conditions improve.” 

In terms of the impact the lower federal funds rate will have on CRE debt, Jackson said, “Lenders have indicated they are offering variable-rate loans in anticipation of further rate cuts over the next year. Beyond this, we don’t expect any major shifts in their approach.” 

Ryan Moore, CEO and co-founder of Last Mile Investments, said he welcomed the Fed’s decision, “as the consumer has been hit hard by both inflation and higher interest rates for some time now, which is a rare combination.  We are glad to see both going in the right direction now.” 

At the National Association of Realtors, chief economist Lawrence Yun issued a statement focusing on the implications for the residential market. “The Fed’s half-point rate cut decision is the beginning of six to eight rounds of further rate cuts well into 2025,” he said. “The very next cut will occur after the presidential election. The justification is cooling inflation in recent months and lighter job gains. 

“Mortgage rates have already anticipated the Fed’s likely path. That is why the 30-year rate has fallen by 150 basis points from early in the year to today. Any further decline in mortgage rates will be minimal.”