Despite growing pressure to lower interest rates, the Federal Reserve chose to leave them unchanged for now, while keeping the door open for cuts later this year. Its willingness to consider a change sent a positive signal to the commercial real estate industry.
Following two days of deliberations by the Federal Open Market Committee, the Federal Reserve’s policy-making body, the central bank kept its benchmark short-term interest rates in the 2.25 to 2.5 percent range.
However, the tone of the panel’s closely watched, post-meeting statement and the Fed chairman’s press conference has changed. Gone, for now, is the word “patient” in how the Fed views the need for future action. The central bank has now said that it “will act as appropriate” to support the economy, indicating that the policy makers are open to cutting rates in the near future as they continue to monitor increased uncertainties affecting the economic outlook and muted inflation.
The Fed’s increased willingness to respond to growing economic uncertainty by reducing rates is good news to commercial real estate, as lower interest rates should support the current decade-long economic expansion. Lower interest rates could also bolster commercial property pricing and keep capitalization rates down.
Economic data have been mixed over the past month, with consumer spending still strong, but somewhat overshadowed by signs of weakness in inflation, manufacturing and the global growth. The latest economic and interest-rate projections from the Fed showed a downward revision to inflation and unemployment forecasts, though overall economic growth expectations have remained largely unchanged.
The cloudier outlook for the economy, coupled with ongoing trade tensions with China, have signaled to financial markets that the Fed will move to cut interest rates several times this year. In fact, even before this meeting financial markets were pricing in near certainty that rates would be cut at the next meeting in July.
While the Fed is guided by its dual mandate of maximum employment and price stability, it is wary of disappointing financial markets, as market volatility leads to tightened financing conditions and declines in business and consumer confidence.
Adding further pressure, President Donald Trump continues to publicly try to persuade the central bank to lower rates. While political pressure does not enter into Fed’s decision making, the central bank is aware of the need to ensure that the markets and the broader public do not begin to perceive that it is caving into the president’s demands.
At the press conference after the meeting, Federal Reserve Chairman Jerome Powell said most policymakers conclude that the case for lower rates has strengthened in recent weeks. He also underscored that the central bank’s future moves will be guided by developing economic trends, especially in inflation and the evolution of risks to the economic outlook.
Financial markets appeared to react positively to the Fed’s latest move, with both stock and bond prices rising.
Galina Alexeenko is a managing director and senior economist for CoStar in Atlanta.