Inside the Guessing Game: Interest Rate Predictions for 2024

In commercial real estate, interest rates are always a hot topic. In the many years leading up to the pandemic, investors and developers were absorbed with trying to guess when interest rates—which at that time had been at historical lows for an extended period —would increase. Today, everyone is trying to guess when they will come down again. It’s a difficult game, particularly for investors trying to build a long-term acquisition and development strategy. 

This year, the interest conversation is particularly compelling. After 18 months of rapid interest rate increases—bringing the federal funds rate from 0% to a range of 5.25% to 5.5%—investors are ready for some relief. With forecasts ranging from tepid to tremendously optimistic, most stakeholders are expecting interest rate cuts sometime this year.  

Here’s a look inside that guessing game. 

The Official Word from the Federal Reserve

In the past five consecutive meetings, the Federal Reserve has held interest rates in place and suggested that it would cut rates sometime in 2024. The welcome news helped to trigger predictions of when those rates would arrive and how investors should prepare for rate cuts. The Fed’s tone following the December meeting was optimistic, with Fed Chair Jerome Powell noting that “inflation eased from highs without a significant increase to unemployment.” At the time, the Federal Open Market Committee predicted that inflation would fall to 2.4% in 2024, and predicted at least three 25 basis point rate cuts this year.   

By the March meeting, the Fed took a cautiously optimistic stance. While, again, the committee left rates unchanged, it also indicated that it does not have plans to reduce rates anytime soon. In an official statement, Fed chair Jerome Powell said, “The risks are really two-sided here. We're in a situation where if we ease too much or too soon, we could see inflation come back, and if we ease too late, we could do unnecessary harm to employment and people's working lives.”  Analysts added that they do not expect The Fed would reach that level of confidence by the May meeting. To begin cutting rates, The Fed will want to see inflation continue to come down and ensure that higher rates don’t begin to negatively impact  economic growth and employment.  There is a delicate balancing act to ensure Powell and the Fed will be able to achieve a soft landing.

The 2024 Predictions

If one were to follow the Fed’s messaging, rate cuts are unlikely to come in the first half of the year; however, with significant changes in messaging from December to March, trusting the Fed’s trajectory can be difficult. Several other economists and forecasting sites have released their own forecasts to predict what The Fed will do this year. Many of these forecasts have a “not if, but when” take on interest rate cuts, boldly predicting that rate cuts sometime this year are a certainty. 

Goldman Sachs has held the most aggressive viewpoint. In January, it predicted The Fed would cut rates five times this year, starting in March. After The Fed’s January meeting, it walked back that forecast, predicting rate cuts would begin in May. By March, Goldman Sachs analysts again reduced its estimates, now predicting three 25 basis rate cuts this year, starting in June. Goldman Sachs is not alone. Bank of America, Barclays, and other Wall Street banks equally predicted aggressive rate cuts this year, but have since abandoned those early estimates. Now, most banks are favoring rate cuts to begin in June this year, starting with the US Federal Reserve and followed by the European Central Bank and The Bank of England. 

A Market with Plateauing Rates

Predicting the trajectory of interest rates or The Federal Open Market Committee’s decisions has always been a fool’s game. As recent history will tell us, it’s almost impossible to predict where rates will land or how the committee will interpret current data. A better strategy, instead, is to analyze the current market dynamics and remain nimble enough to adjust to changes in the future. After all, the markets are never stagnant, and the ability to operate in less-than-ideal conditions will put your firm at a unique advantage. 

So, what do we know today? The Fed has not increased interest rates at its last five meetings, with the last rate increase in July 2023. As a result, rates haven’t increased in eight months. In January, it removed language from its statement that the Fed would continue to increase rates until inflation is brought under control, and maintained that sentiment in March. While the Fed has also been transparent about its unwillingness to reduce rates before it sees more balance in the economy, this means that investors can be confident that interest rate increases have stalled. That’s good news for many investors. Last year, the capital markets were marred more by interest rate volatility and the speed of the increase than by the increase in rates itself. Plateauing rates offer relief from the volatility and uncertainty that has characterized the market in 2023.  

Interest rates are always an important metric for investors, but there are modern ways to mitigate the impact of higher capital costs. Modern real estate development software like Northspyre can meticulously track spending and budgets to the direct benefit of a project’s bottom line. By reducing the overall budget and overruns developers can offset the higher cost of capital. While technology can’t predict interest rates or reduce the cost of capital, it can drive valuable efficiencies in a project that decrease the impact of higher rates. 

Download our white paper “Maximizing Returns: Operating in a New Normal” to learn more about navigating the current economic environment and coming out of this period with a competitive edge.