Federal Reserve is Holding Steady

Despite growing speculation following the Federal Reserve’s July 31 meeting, where they decided to keep the benchmark rate steady, they are not yielding to the pressure.

The Federal Open Market Committee (FOMC) of the Federal Reserve kept the federal funds rate range where it has been between 5.25% and 5.5% on July 31, 2024. The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2%.

Chair Jerome Powell indicated, “If inflation decreases rapidly as expected, economic growth stays reasonably strong, and the labor market remains stable, then a rate cut might be considered at the September meeting.”

Higher for Long Enough?

“The FOMC did not change its target for the federal funds rate but did shift its statement to acknowledge that inflation is slowing, unemployment is rising, and there are now more balanced risks to the economy,” wrote Mortgage Bankers Association SVP and Chief Economist Mike Fratantoni. “While the Fed still hopes for a slower rate of inflation, there is a greater risk now that keeping monetary policy overly tight for too long could lead to unnecessary higher unemployment.”

According to Marty Green, principal at mortgage law firm Polunsky Beitel Green, “while a September cut is still very much in the cards, it doesn’t appear to be guaranteed at this point. But it sure feels like the Fed believes the rates are getting very close to being ‘higher for long enough’ instead of ‘higher for longer.’”

One reason a rate cut was not announced is that it would likely be the first reduction in a sequence to recalibrate rates lower. Officials have been surprised by inflation in the past and want more evidence it is truly cooling before crossing the rate-cut threshold. Nonetheless, officials have grown more wary of waiting too long and blowing a soft landing. Bringing inflation down to the Fed’s 2% goal while maintaining a healthy labor market is the No. 1 thing that keeps Jerome Powell awake at night.

The Fed’s newfound readiness to cut rates reflects three factors: a) better news on inflation, b) signs that labor markets are cooling and c) a changing calculus of the dueling risks of allowing inflation to remain too high and of causing unnecessary economic weakness. The Fed doesn’t expect demand or hiring to weaken much in the coming months, but if it is wrong, it probably won’t be able to cut rates quickly enough to forestall a recession indicated San Francisco Fed President Mary Daly.

“We set this rate when inflation was over 4% and inflation is now 2.5%. That implies we have tightened a lot since we’ve been holding at this rate,” Chicago Fed President Austan Goolsbee said. “You only want to stay this restrictive for as long as you have to, and this doesn’t look like an overheating economy to me.”

Economic Outlook

Outlook and state of the economy: As of now, the economy looks like it is in a stable place, at the very least, GDP in the second quarter inched up by 2.8%, and was ahead of the market expectation of 2.1%, according to CBRE’s commercial real estate experts. It is projected lower inflation, coupled with rate cuts, will lead to higher industrial and office leasing activity.

Long range predictions see the 2024 Fed funds rate ranging from 4.75% to 5%. In 2025, it is estimated that it will be between 3.75% and 4% before falling in the range of 2.25% and 2.5% during 2026-2028.

Activity in the Albuquerque market remained steady in July. As the month closed, the activity level picked up with more buyers in the market seeking quality office space to purchase and/or lease. Landlords who provide move in ready space tend to have fewer vacancies than those with spaces that need updating/upgrading.

As we move into fall, I expect the activity level to continue to pick up.  The challenge will be locating quality existing office product for the buyers and tenants in the market seeking space. Perhaps the lack of inventory may lead to new office developments in the future.