Intelligent Investment
Economic Watch: Fed Holds Rates Steady; Signals Caution
May 1, 2024 3 Minute Read
Executive Summary
- The Federal Reserve kept the federal funds rate at a range of 5.25% to 5.5% today and indicated a more cautious approach toward rate cuts this year.
- The Fed also announced that it will slow reductions to its balance sheet (quantitative tightening or QT). Its runoff of Treasury securities has been reduced to $25 billion from $60 billion per month while its runoff of mortgage-backed securities will remain at $35 billion per month.
- CBRE still expects that the central bank will cut the federal funds rate by a quarter-point in July, as long as inflation eases over the coming months.
- High interest rates and a cautious Fed will keep real estate capital markets activity subdued in H1 2024, but a modest rise in activity is possible later in the year.
- Leasing activity likely will remain relatively resilient if solid economic growth continues.
The Bottom Line
Today's announcement illustrates the complex job the Fed faces in lowering inflation without tipping the economy into recession. On one hand, the Fed’s slowing reductions to its balance sheet is a step toward monetary easing. This will help to reduce bond market volatility, supporting both risk appetite and asset prices. On the other hand, the Fed continues to take a cautious approach toward lowering the fed funds rate due to above-target inflation. Lower policy rates are key to unleashing investors’ “animal spirits.” CBRE now expects just two rate cuts in 2024 (down from three): one in July and the other in December.
We do not think that inflation will accelerate over the near term due to expectations of lower shelter prices, easing wage growth and a more balanced labor market. Delayed rate cuts will keep borrowing rates elevated, but we anticipate the 10-year Treasury yield will decrease to 4.1% at year-end from 4.6% today.
High interest rates will constrain commercial real estate investment activity, but a modest recovery later this year is possible. Continued resilience in the economy will be a tailwind for office and industrial leasing activity.
Figure 1: CBRE House View
