Powell Raises Hopes For September Rate Cut

The Federal Open Market Committee left interest rates unchanged Wednesday, marking the eighth consecutive meeting where it held the central bank’s discount rate between 5.25% and 5.5%.

The Fed didn't explicitly signal any upcoming cuts, but the FOMC and Federal Reserve Chair Jerome Powell took a slightly rosier tone Wednesday than in past meetings.

"We have made real progress on inflation," Powell said. "We are not quite there yet. But we are more confident that we're on a sustainable path down to 2%."

And as inflation cools and unemployment rises, there is increased optimism from the real estate industry that interest rate reductions are right around the corner.

Jerome Powell

"We have made no decisions about future meetings, and that includes the September meeting," Powell said in a press conference Wednesday afternoon. "The broad sense of the committee is that we're getting closer to the point at which it will be appropriate to reduce our policy rate, but we're not quite at that point yet."

Powell presented a case in which a rate cut would be appropriate in September: Inflation moving down quickly in line with expectations, growth remaining strong and the labor market staying consistent with its current condition.

He said the totality of the data, not just inflation readings, will guide the Fed's decision-making process as it balances its dual mandate of stable prices and maximum employment.

The personal consumption expenditures price index, the Fed's preferred inflation gauge, rose 2.5% year-over-year in June, continuing a steady downward trend, although it remains above the Fed's goal.

"We have a restrictive policy rate, it's clearly restrictive," Powell said. "The time is coming at which it will begin to be appropriate to dial back that level of restrictions so that we may address both mandates."

The FOMC said in a press release accompanying the decision that job gains have moderated and its employment and inflation goals are in "better balance." The national unemployment rate has gradually ticked up and hit 4.1% in June, the highest mark since November 2021.

Rising unemployment could lead the Fed to lower rates to protect against recession risks, said Derek Tang, an economist at LHMeyer. The central bank still cares about its inflation target, but it can afford to "spread its attention" to prevent the economy from cooling down and speeding into a recession scenario, Tang said.

Cushman & Wakefield CEO Michelle MacKay said on the company's Q2 earnings call Monday that the firm believes a majority of the uncertainty around interest rates and inflation is starting to move into the rearview mirror. She predicted the Federal Reserve will cut rates in short order, spurring a "waterfall effect" of transaction activity.

"When the Fed cuts rates, which we believe will be soon, it will signal to the market that it's time to move into commercial real estate," MacKay said. "It's gotten better already in capital markets, and we expect some of the money on the sidelines to engage really quickly."

MacKay said some assets might move immediately following a cut, but that a larger volume of completed transactions will begin to happen at the end of this year and the beginning of 2025 after a couple of rate cuts are in the books.

"The inflection point will be the first time the Fed makes a move," she said. "That will start to lead people into the right place to make decisions."

Once that first rate cut happens, real estate will start looking to understand when the next reductions will happen. An understanding of how often the Fed will lower rates and the long-term rate target is important for setting longer-term yields today and not just in the future, Tang said.

"As we get to the first rate cut, the focus of the committee will turn to ... what the shape of the cutting cycle looks like," Tang said. "The shape of the cutting cycle is really much more important for asset pricing, whether it's real estate or stocks or so on."

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