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The Market Has Stopped Fighting the Fed

By: Scott Williams

Over the past several years, one of the most consistent themes in the capital markets has been the disconnect between what the Federal Reserve was saying and what the market believed.

The Fed repeatedly communicated that inflation would take time to tame and that interest rates would likely remain higher for longer than many investors expected. Meanwhile, investors consistently priced in earlier and more aggressive rate cuts. Time after time, the market bet that the Fed would eventually blink.

Sometimes the market got ahead of the Fed. Other times, the Fed stayed the course.

I was reminded of this dynamic last week while attending the IMN Real Estate Private Funds Conference in Newport, Rhode Island. Among fund managers, institutional investors, lenders, and capital providers, one theme surfaced repeatedly: the market is finally beginning to accept that “higher for longer” may no longer be a temporary phase—it may be the environment we have to invest in.

That is a meaningful shift.

For much of 2025 and into early 2026, investors largely believed rates were headed lower. The Federal Reserve had already delivered three rate cuts, inflation appeared to be moderating, and futures markets spent much of the first quarter pricing in two or three additional cuts during 2026. It seemed reasonable to believe we were finally on the downhill side of the rate cycle. As Treasury yields drifted lower and inflation forecasts stabilized, many investors began underwriting transactions with the expectation that financing conditions would continue to improve.

A New Fed Chair

Kevin Warsh’s first meeting as Fed Chair surprised many market participants, myself included. Given his appointment by President Trump, many expected a more dovish tone and perhaps a quicker path toward lower rates. Instead, Warsh strongly reaffirmed the Fed’s 2% inflation target, eliminated forward guidance, declined to submit his own dot plot projection, and presided over a Summary of Economic Projections that, if anything, reflected a more hawkish committee than markets had anticipated.

The Fed’s Current Dot Plot (Year-End Rate Projections):

Three Hikes – 1 participant

Two Hikes – 5 participants

One Hike – 3 participants

No Change – 8 participants

One Cut – 1 participant

The Conversation Has Shifted

Just a few months ago, investors were debating how many cuts we might receive this year.

Today, the discussion has shifted toward whether the next move could actually be another hike. That is a remarkable change in a matter of months.

Whether or not another hike ultimately materializes is almost beside the point. The important development is that the market’s baseline expectations have fundamentally changed.

One of the most interesting discussions throughout the IMN conference centered on asset pricing. There was broad recognition that while financing markets have largely adjusted to a higher-rate environment, asset values are still in the process of catching up. Price discovery is happening, but it remains incomplete. Assets continue to trade, lenders continue to work through challenged situations, and valuations continue to evolve as the market gradually accepts that today’s cost of capital may persist longer than many originally expected.

This does not necessarily mean commercial real estate is headed for another major correction.

Transactions are occurring. Capital is still available. Good deals are still getting done.

What has changed is the framework.

Rather than assuming rates will solve the investment equation, investors are increasingly underwriting deals that work under today’s financing assumptions. If rates improve over time, that becomes additional upside—not the reason the investment works.

In many ways, that is a healthier market.

The market may have finally stopped fighting the Fed.

If so, that acceptance could ultimately do more to restore transaction volume than another quarter-point rate cut. Markets function best when expectations align with reality. While “higher for longer” may not be the outcome investors were hoping for, it is an environment that can be underwritten, priced, and invested in with confidence.

The market doesn’t need lower rates nearly as much as it needs confidence in where rates are likely to be. If “higher for longer” becomes the new baseline, investors can underwrite it, lenders can finance it, and transactions can move forward. Markets don’t require perfect conditions – they require predictable ones.