Unpacking the Fed’s Surprise Rate Cut and the CRE Implications
The Federal Reserve’s surprise decision this week to lower the federal funds rate by 50 basis points looked to many like a panic move over the threat of a coronavirus epidemic, and the stock markets reacted negatively.
However, while the Fed’s Federal Open Market Committee cited the potential impact of the coronavirus in announcing the rate cut, Cushman & Wakefield economists Kevin Thorpe and Rebecca Rockey see something else behind the decision.
“The committee is responding to the shift in financial markets that saw the 10-year Treasury note yield fall sharply below the federal funds rate,” they write. “When short-term interest rates are well above long-term rates, it can reduce the availability of capital and slow economic growth. We believe that this concern was one of the key drivers of this surprise policy move.”
Moreover, the Fed still has a few other arrows in its quiver. If necessary, it could cut rates again, “provide forward guidance to signal lower rates for longer, use quantitative easing, ease credit standards and possibly deploy other tools,” according to Thorpe and Rockey.
At this early juncture, Thorpe and Rockey acknowledge, it’s not clear how impactful some of these measures would be in terms of supporting the economy, “given that the Fed’s measures mainly stimulate demand, and the central issue with the virus is that it is causing both supply and demand disruptions.”
Nevertheless, they write, “the Fed still has many levers it can pull. Further fiscal policy is thought to have ample room to stimulate demand as well.”
And, while Wall Street’s response to the FOMC’s action was instantaneous, “property markets are not the stock market,” Thorpe and Rockey write. “They move more slowly and are driven by leasing and economic fundamentals. We will not know the ultimate commercial real estate impacts of the coronavirus for several more weeks or months.”
Meanwhile, though, the Fed has demonstrated that it’s ready to act as needed “to respond to changes in the economic and financial environment. We think this is a positive development for both the economy and for commercial real estate.”
Further, they write, the cut in the federal funds rate “should help support the economy through this difficult period, reduce borrowing costs and help to ensure continued stability for the property markets.”
For comments, questions or concerns, please contact Paul Bubny
- ◦Economy
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