The Fed’s Big Cut: Rapid Response

The Federal Reserve's decision to cut rates by 50 bps (basis points) at September's Federal Open Market Committee (FOMC) meeting marked a shift toward neutral policy, accelerating a rebound in capital markets.

What the Fed Said

Fed Chair, Jerome Powell, emphasized that the U.S. economy and labor market remain solid, with headline inflation easing to 2.5% in August. While the labor market is cooling, Powell highlighted that there are no signs of a downturn, and the Fed aims to keep unemployment from further increases. The 50-bps cut was presented as a one-off measure, potentially catching up from not cutting rates in July.

The Fed remains confident that inflation will continue to ease toward its 2% target. Shelter inflation is expected to decline as rent growth has slowed throughout 2024. The Fed's emphasis on labor market stabilization over inflation control marks a shift in its focus.

What We Think

Although the 50-bps cut was considerable, the Fed clearly explained its reasoning without sounding overly dovish. The market may continue to push for more cuts than the Fed can reasonably deliver without stoking inflation.

We believe the expectation gaps may contribute to high volatility. We welcome the easing market conditions for commercial real estate and agree with the Fed's shift toward a neutral policy rate. We've revised our interest rate projections to fast track the first stage of rate cuts, with a slower second stage of neutral rate discovery.

Compared to the Fed's economic projections, we forecast a slightly higher unemployment rate and slower GDP growth. We expect cuts to be front-loaded in 2025 to prevent further labor market weakening. In late 2025 and early 2026, we anticipate a pause in the cutting cycle as the Fed assesses the neutral level of the policy rate, which we estimate will settle at 2.75%-3.00%.

Revising Our Outlook

Faster cuts are likely to stabilize and then compress cap rates sooner than previously expected in our forecasts. While the short-term outlook is positive, potential inflation risks and bond market dynamics could complicate the long-term outlook. As liquidity increases in the market, real asset transaction volumes should recover. However, we expect a more cautious approach in the long run due to uncertainties surrounding potential new administration's fiscal policy and spending plans following November's U.S. presidential election.

Market Reactions

Reactions across the markets have been mixed:

• Bond market dip: The bond market priced in recession-level or emergency-level rate cuts before the meeting. The 10-year Treasury yield terminal moved up decisively after the Fed confirmed a priority shift from inflation to maximum employment. Consequently, inflation expectations drifted up.
• Stock market rally: In contrast, the stock market embraced the cut, with shares rallying to near all-time highs. The Fed's move towards easing was seen as a signal that capital markets are heading into recovery mode. Powell's reassurances about a healthy and buoyant labor market also helped temper recession fears.
• Dollar weakens, gold strengthens: As expected, the dollar fell, and gold rose. While long-term concerns over U.S. Treasury pricing and fiscal deficits persist, the dollar should remain relatively strong in the current risk environment.

Impact on Real Assets

The Fed's rate cut shows a clear tilt toward supporting the labor market while inflation moderates. The move provides clarity that many investors were waiting for and will likely trigger an end-of-year increase of real asset activity. Lower borrowing costs and improved liquidity should facilitate refinancing and new lending.

In the near-term, it's "go time" for investors ready to put capital to work, but careful monitoring of broader economic developments is crucial. Our updated real asset forecasts will be published shortly.