X-Caliber September 2024 Market Movers
After the Fed Cuts Rates What’s Next?
Financing Future
This September brings children back to school, a first hint of a coming autumn, and a virtually guaranteed federal funds rate cut. Not only did Federal Reserve Chair Jerome Powell at the end of the central bank’s annual Jackson Hole conference say that the “time has come for policy to adjust,” there has been largely positive economic data right before and since.
However, “largely” is subjective. The Bureau of Labor Statistics released its annual jobs revision numbers — a downward 818,000, or 0.5% drop from the original estimates. The last two jobs reports came in under expectations. The Fed Beige Book for August found a slowing economy.
Then again, the yield curve has trended toward normalcy with the 10-year Treasury yield slightly higher than the 2-year’s for the better part of this last week. The Census Bureau reported that median household income has returned to pre-pandemic levels. Headline CPI inflation was under expectations, though core inflation and shelter were higher. And, Barron’s pointed to the difference between the federal funds rate and the 2-year Treasury yield as the largest since 2008 and a signal of a significant shift in monetary policy.
The federal funds rate will be known by the end of the Federal Open Market Committee tomorrow afternoon. Estimation of the size has proven steadfastly volatile. According to the 30-day Fed Funds futures prices as reported by CME FedWatch, there is a 100% expectation of a rate cut. But the size? On September 5, the chances were 60% of a 25-basis-point drop and 40% of a 50-basis-point reduction. By September 12, those changed to 72% of a 25-basis-point and 28% of a 50-basis-point cut. And as of today, it had become 65% for a 50-basis-point cut and 35% for 25 basis points.
In other words, the accuracy and stability of such federal funds rate projections, at least in the immediate future, are questionable. Forces affecting the decisions of rate futures investors — who collectively establish the odds — can shift from hour to hour. Such factors as economic reports, market conditions, and news push them from one place to another. Think of how many in early 2024 were certain of March rate cuts.
Although accuracy in short-term dynamic group estimates is impossible to guarantee, there is an underlying assumption that the federal funds rate will be in the 3.00% to 4.00% range by the May 2025 meeting. This seems realistic.
“I think we probably won’t go back to that era between the global financial crisis and the pandemic, [when] rates were very low, and inflation was very low,” Powell said in July congressional testimony. These estimates are well above the post-GFC figures and yet well under those found in the 1990s and 2000s when the effective federal funds rate after a recession recovery ran between 5% and 6%.
The market is currently expecting Fed funds rates to reach about 3.0% in June 2025 with an anticipated bottom of 2.7% in early 2026.
Compare these figures to recent history. Since August 2023, SOFR has hovered around 5.3%. The 10-year yield’s most recent peak, in April 2024, was about 4.7%. Those seeking permanent financing have already reaped the positive impact of recent rate moves. On the multifamily side, agency and HUD rates are hovering right around 5.0%. Real estate investors with floating rate debt or seeking short term bridge debt will also benefit from the anticipated rate cuts, reducing debt service materially.
Important for CRE investors is to remember that this is a long game. You won’t change your financing on a daily or weekly or monthly basis. Could there be a better option in six months or a year? Sure, but there might be a worse one as well. Focus on what makes financial sense over a longer term and hedge for potential changes that might throw a monkey wrench into plans.
