October 31, 2019
By David Cohen
On Wednesday, the Federal Reserve voted for its third consecutive rate cut in the federal funds rate this year, but Fed Chair Jerome Powell signaled the U.S. central bank will leave borrowing costs where they are going forward, unless the economy takes a material turn for the worse.
“We believe that monetary policy is in a good place,” Fed Chair Jerome Powell said in a news conference after the Fed announced its decision to cut its lending rate to a target range of between 1.5% and 1.75%.
In a statement, the Fed’s Federal Open Market Committee (FOMC) hinted that the Oct. 30 cut may be the last for a time, removing a clause that appeared in post-meeting statements since June saying it was committed to “act as appropriate to sustain the expansion.”
Instead, another clause appeared in its place that read:
“The Committee will continue to monitor the implications of incoming information for the economic outlook as it assesses the appropriate path of the target range for the federal funds rate.”
The cut was widely anticipated by both financial markets and CRE experts alike.
“It wasn’t that surprising,” said Jim Costello, senior vice president at Real Capital Analytics. “As for the impact on the market for commercial prices, I don’t think there will be much of a change. We seem to have hit a bit of a floor for mortgage rates and it’s not like commercial mortgage rates have been down much anyway. That matters because if you have cheaper financing, maybe investors would allow cap rates to compress more. But, it’s hard to see that happening.”
George Vail, principal at Avison Young, said that the Fed’s Cut is positive for the CRE industry overall.
“The impact of today’s interest rate cut by the Fed is mostly going to be seen through a decrease in short-term rates that will positively affect financing such as construction loans and floating rate debt,” he said. “The cut has already been priced into longer-term interest rates, so we won’t see much of an impact there. Overall, it’s positive for the commercial real estate industry.”
Ryan Severino, Chief Economist at JLL, expects the impact from the Fed’s most recent rate cut to be muted.
“The impact from the rate cut should be limited and take time to emerge,” he said. “Interest rates remain at low levels and very few businesses cite high interest rates as an impediment to borrowing. Additionally, it fails to address the major problem restraining investment in the economy: trade policy uncertainty. It could help prop up business sentiment, which has been relatively weak, but more direct impacts should be minimal.”
Other experts did not share the same positive outlook.
K.C. Conway, CCIM Institute’s Chief Economist, shared that the Fed is preemptively cutting rates when it should wait for more concrete markers of a recession.
“The first read on Q3 GDP today beat expectations of +1.9% despite tariffs and trade war headwinds and third quarter earnings are looking good again,” said Conway. “Maybe it all makes sense when one realizes that in addition to today’s rate cut the Fed dropped from its statement the phrase: ‘The Fed will act as Appropriate.’ Since nobody is behaving as appropriate in D.C., why should the Fed act as Appropriate?”
“This economy is not 2007-2009,” he added. “The consumer is all happy, healthy and housed. Small Business is still optimistic, according to NFIB. We still have more Job Openings than unemployed, with a 50-year low unemployment rate of 3.5%. This Fed is not acting as appropriate and is wasting its ammunition for when we do have a recession again.”
Going forward, the Fed’s Powell said that the current level of rates is “likely to remain appropriate” given the nation’s currently moderate economic growth as well as a strong labor market and inflation sitting around 2%.
“If that changes, the Fed will respond accordingly,” said Powell.
“Looking ahead, it’s a three-dimensional chess game,” said RCA’s Costello. “They say the rates are going to hold for awhile. If they don’t, what does that mean? That’s the much bigger question. If suddenly there’s a need to cut more because of a weak economy that’s even worse for property, because in a weak economy, tenants can’t pay rent and property income can’t grow. That can be a bigger problem.”
For comments, questions or concerns, please contact David Cohen