In October, The Federal Reserve voted to lower interest rates for a second time this year. The decision reduced interest rates by .25%, bringing the benchmark rate to a range of 3.75% to 4%, the lowest rate since 2022. It was highly anticipated among economists and other financial leaders—and a welcome reprieve for many commercial real estate players that have been operating under crippling capital costs. However, the debate over interest rates has revealed some startling economic challenges, like a weakening job market and stubborn inflation.
This month, the Federal Reserve Chairman spoke openly about the challenges The Federal Reserve faces in moving rates in either direction. The Federal Reserve Open Market Committee will meet once more in 2025, but there is still little clarity about the future of rate cuts this year and into 2026. Here is some deeper insight into the FMOC’s recent rate cut decision, what is to come, and how the rate cut is already impacting capital costs.
Balancing the Data
In setting interest rates, the FOMC committee has a dual mandate: to promote a strong employment market and to keep inflation at 2%. Today, those metrics seem to be in opposition with one another. The most recent CPI report pegs inflation at 3% annually, still well above the Fed’s 2% target. High inflation would typically trigger an interest rate increase. On the employment front, it’s another story. There is no September jobs report available due to the government shutdown, but available data estimates 50,000 jobs were added in September, up from only 22,000 jobs in August, with a 4.3% unemployment rate. The weakening employment market would normally encourage an interest rate decrease, thus creating a conundrum for the FOMC.
At the Meeting of the National Association for Business Economics in early October, Powell highlighted the disparity. “There is no risk-free path for policy as we navigate this tension between our employment and our inflation goals,” he said. While hot inflation had fueled the swift increase in interest rates from 2022 to 2024, the employment market is changing the conversation. Some members of the committee would like to see interest rates come down as swiftly as they increased, but Powell—still the helm of the ship until May—is intent on maintaining a measured strategy. “Rising downside risks to employment have shifted our assessment of the balance of risks,” he said. “As a result, we judged it appropriate to take another step toward a more neutral policy stance. We will set policy based on the evolution of the economic outlook and the balance of risks, rather than following a predetermined path.”
Future Rate Cut is Uncertain
The October interest rate cut was unusual in that it happened during a government shutdown. As a result, the FOMC didn’t have access to the most recent economic data when it made its decision. During a government shutdown, data isn’t only delayed, it isn’t collected, and the lack of available data may affect another rate cut at the December meeting. The White House has already said that October’s CPI report will likely not be published, according to reporting from The New York Times, and jobs reports will be “indefinitely delayed.”
Powell noted his concern over available data when speaking to reporters at the press conference following the October meeting. He said the committee will use all data sources available, both public and private, but the shutdown may still impact future decisions. “We’re going to collect every scrap of data we can find, evaluate it and think carefully about it. And that’s our job,” he said. “If you asked me, could it affect the December meeting? I’m not saying it’s going to, but yeah, you could imagine that. You know, what do you do if you’re driving in the fog? You slow down.” Alongside these comments, Powell also noted that this was a “temporary state of affairs,” and said the data could come back.
Commercial Mortgage Rates Begin to Correct
In the last three years, the Federal Reserve has become the most watched federal agency, and interest rate decisions now make mainstream national headlines. The attention is for good reason. The FOMC’s interest rate decisions have a real-world and sometimes immediate real world impact on debt costs. While it isn’t the only factor—commercial mortgage rates are based on a variety of economic factors—the benchmark rate is an important indicator, as seen by current trends in mortgage rates. Thanks to the two consecutive rate cuts, mortgage rates are lower today than they were a year ago, sitting in the 6% range, depending on the type of loan.
Lower borrowing costs are a long awaited change for commercial real estate developers that are trying to make new projects pencil. Lower borrowing costs could change the outcome of a prospective deal. Commercial real estate developers have other tools at their disposal, too, to navigate the challenging economic environment. Modern real estate development software like Northspyre use advanced technology like AI, automation, and analytics to streamline the project management on a commercial real estate development to create valuable efficiencies that have a meaningful impact on profitability and return. Eliminating expensive silos in the development cycle and making project outcomes more predictable is essential in the current era of market uncertainty. Combined with lower borrowing costs, commercial real estate developers can unlock opportunities that may not have been viable just a few months ago.
Book a demo and learn more about how Northspyre can help your development team make smarter decisions from pre-development through stabilization.
