Federal Reserve Chairman Jerome Powell said policymakers are getting closer to lowering interest rates, possibly as soon as September, if conditions warrant as policymakers wrapped up a two-day meeting Wednesday.
For now, central bank policymaker decided to leave overnight lending rates unchanged at their meeting this week, their eighth consecutive meeting to do so. The widely expected decision leaves the overnight lending target rate for banks between 5.25% and 5.5%, a 22-year high.
The decision was issued after the Commerce Department’s latest report showed inflation cooling in June. The headline personal consumption expenditures (PCE) price index ticked lower to 2.5%, but the core price index, which excludes food and energy and is the Federal Reserve’s preferred measure of inflation, remained unchanged over the month. This may support the suggestion that policymaking committee members would feel more confident that inflation is moving sustainably lower if given additional “good” data, as Federal Reserve Chair Jerome Powell has repeatedly insisted.
Powell spent much of his post-meeting press conference answering questions about when and under what conditions rate cuts would start. According to financial services firm CME Group's FedWatch Tool, traders are fully expecting rate cuts beginning in September, with two or more rate cuts later this year.
Commercial real estate markets, in particular, have been eager for rate cuts. Should the Fed lower rates in September, markets can expect a surge in sales activity through the end of the year, as investors would likely anticipate even lower rates ahead. Even a boost in sales activity would likely not be enough to produce to a full recovery in property values, which have seen losses of between 15% and 40% since the onset of the pandemic.
However, the year has seen some encouraging signs in the capital markets. The cost of capital for many real estate investors began to fall in the second quarter of 2024, primarily due to the revival of the commercial mortgage-backed securities market. Some investors believe peak rates are in the past and consider it now time to take advantage of rate sensitivity. This renewed investor interest has made capital more available and often cheaper than other financing options, leading to a noticeable uptick in sales compared to the previous year. Indeed, commercial real estate sales volume was up 8% from last year, marking the first year-over-year increase since the second quarter of 2022.
While this anticipated initial rate cut might bolster investor confidence in the short term, the fundamental justification for rate cuts will matter.
The Federal Reserve has been balancing its dual mandate of maximum employment and price stability. Rate cuts risk reinvigorating activity, which could reaccelerate inflation, while keeping rates high risks damaging the economy, causing labor markets to falter and unemployment to rise.
With the labor market extraordinarily tight since the pandemic began in 2020, the Fed has been able to focus more on its inflation fight. However, as price hikes are now cooling and its target is in sight, the Fed is becoming more watchful of events in the labor market as evidence of some weakness emerges.
The unemployment rate ticked higher to 4.1% in June, compared to 3.5% a year ago. Layoffs have been drifting higher, as have continued claims, suggesting that unemployed workers are taking longer to find replacement jobs. Moreover, job openings fell to 8.2 million on the last business day of June, down by 941,000 over the year, bringing the number of openings for each unemployed worker to 1.2, similar to the pre-pandemic ratio.
The committee’s statement issued at the end of its two-day meeting noted that it is “attentive to the risks of both sides of its dual mandate,” a reflection of its heightened concern about the health of the labor market.
However, the economy remains on solid footing for now. In its advance estimate, the Commerce Department reported that the economy grew at a seasonally adjusted annualized rate of 2.8% in the second quarter, far surpassing analyst expectations and double the rate in the year's first quarter.
This showing should alleviate some Fed officials' concerns about the economy's strength after the first quarter’s slowdown. In his comments, Powell suggested that should the economy remain on solid footing, the labor market remains as is, and inflation continues to move lower, a rate cut at the committee’s September meeting could be warranted, but policymakers will be watchful for deteriorating conditions.