As predicted, the Fed announced (more or less) it’s much anticipated ‘pivot’ regarding interest rates. Jerome Powell took an early victory lap Wednesday concerning the fight against inflation. Let’s hope he’s right this time and doesn’t go 0 for 3. Please recall his ‘no inflation’ and ‘transitory’ forecasts.
From a strictly pragmatic standpoint, speaking to the likelihood of rate cuts in 2024 makes good political sense. First and foremost, it’s an election year. Every sitting president likes lower interest rates. They are broadly stimulative to the economy and most folks vote their pocketbook.
These comments and anticipation thereof ignited a rally in both stocks and bonds. If this continues, it will have a positive net wealth effect making people feel richer. This could make them more favorably disposed to the current administration come November regardless of continuing chaos at the border and abroad.
When Mr. Powell embarked on his belated series of rate hikes in March of 2022 to arrest and reverse the inflationary spiral, he and other central bankers catalyzed with their zero interest rate policies, there were two paths available to him: that of Arthor Burns or Paul Volcker.
Burns, Chairman of the Fed from 1970-1978, raised interest rates in his fight against The Great Inflation from 1965-1982 until the economy squeaked. He then eased off, starting printing money again and inflation came roaring back.
Volcker, Fed Chairman form 1979-1987, finally broke the beast’s back, slamming the brakes on the economy by raising interest rates to 20%.
However, unlike his predecessors temporary and ultimately unsuccessful fix, this tough medicine provided the predicate for nearly 30 years’ worth of economic growth and prosperity.
Being highly politicized, we anticipated Powell would take the former, less painful course of action. Looks like we were right, only time will tell whether this is appropriate or not.
In the interim, these rate cuts may prove palliative for commercial real estate. It may begin to normalize a heretofore unstable and uncertain lending environment. This could bring buyers and sellers closer together in terms of pricing expectations.
It may also push many procrastinators off the fence if they think cap rates are about to reverse course. Improving market conditions and better pricing may move much money off the sidelines in anticipation of a bottom finally being put in.
If this proves to be the case, commercial real estate may have dodged a bullet in terms of more distressed properties. This is something both buyers and sellers can be thankful for.