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The Fed Cut Rates, And Rates Went… Higher?

The long-anticipated rate cut from the Federal Reserve came on Wednesday September 18th. The cut was 50 bps (0.50%) to an effective Fed Funds rate of 4.75% – 5.00%. In addition to the cut in September, the Fed’s published Summary of Economic Projections (link) included an additional 50 bps of cuts by the end of 2024. Further cuts are expected in 2025 with the projection currently split between a 3.00% and 3.50% federal funds rate, which would be a total of 2.00% – 2.25% in total cuts from the start of the easing cycle (September 2024) through YE 2025.

Source: Federal Open Market Committee Summary of Economic Projections 9.18.24

The 50 bp cut was unexpected by some as many had anticipated that the first cut would be only 25 bps, and the future projections mark a notable change from the Fed’s projections in June. The Fed cited that the restrictive policy is having its desired effect on inflation, which they see headed back to their target of 2.0%, but that they are now more concerned with the current policy’s impact on unemployment, which came in higher than their expectation from June.

Source: Federal Open Market Committee Summary of Economic Projections 9.18.24

Impact on Commercial Real Estate Rates
Immediate impacts were felt in both the Prime Rate, which dropped by a mirroring 50 bps to 8.00% and SOFR, the widely used floating rate index. That said, bear in mind that the majority of commercial real estate interest rates are priced above corresponding US Treasury Rates. On the longer-end of the curve, the US 10-year Treasury moved up slightly intra-day on the day of the Fed cut, and mildly expanded and stabilized above its September 16th low for the past year.

US 10-year Treasury Yield Chart 8.30.24 – 9.30.24 Source: YCharts.com

This is due primarily to the bond market anticipating the Fed’s cut ahead of time and then immediately reacting to other market data in a dynamic fashion, whereas the Fed rate cuts come in a static fashion based on information available to them only up until their meeting. While the intra-day movement moved higher while the Fed cut rates, 10-year Treasury rates are still down around a full 1.00% over the past year, providing positive sentiment and interest rate relief to CRE Borrowers.

US 10-year Treasury Yield Chart 9.29.23 – 10.1.24 Source: YCharts.com

With regards to the Bond market, larger impacts were felt on the shorter-end of the curve in the 2-year, 5-year, and 7-year Treasury rates (most widely used for CRE). The most positive impacts are the uninversion of the 2-year and 10-year Treasury (2-year being lower than 10-year) and also the steepening of the yield curve among the 5-, 7-, and 10-year yields. While the yield curve is not completely uninverted as the 2-year remains higher than the 5-year, this trend is positive for future interest rate outlook as it reflects the Bond market’s bets on future interest rate policy as well as economic conditions for CRE borrowing.

Interest rates for CRE loans are made up of the risk-free rate, which is effectively the corresponding treasury rate to the term of the loan (I.E. 5-year treasury for 5-year loans) plus a spread, which is comprised of a few elements. The trend of this uninversion (normalizing) and steepening of the yield curve has additional positive impacts on CRE interest rates, as it will lower elements of the interest rate spread and also provide additional liquidity for CRE lenders in the market, all of which will have positive overall effects on interest rates for CRE loans.

While longer-term fixed-rates for commercial real estate are relatively unchanged by the Fed rate cut, short-term floating-rate debt was and will continue to be directly impacted, which will have additional positive impacts on bridge loans and loans for development. Also, the overall sentiment that we are entering an easing cycle will likely have a positive psychological impact on investor’s and bode well for CRE activity.