As Global Stock Markets Nosedive, Heat Is On Fed to Cut Rates Deeply in September

U.S. Sen. Elizabeth Warren chimed in on the chaos Friday via a post on X — formerly known as Twitter — writing:  “Fed Chair Powell made a serious mistake not cutting interest rates. He’s been warned over and over again that waiting too long risks driving the economy into a ditch.”  

Friday’s jobs report also prompted analysts at J.P. Morgan and Citigroup to project a 50 basis point interest rate cut by the Federal Reserve at its next meeting on Sept. 18 after the central bank signaled a potential quarter-point reduction last Wednesday. The Fed has now paused its benchmark interest rate for eight straight meetings after implementing hikes in 11 of 12 sessions from March 2022 to July 2023 to between 5.25 percent and 5.5 percent compared to previous near zero borrowing levels. 

Ryan Severino, chief economist at real estate investment firm BGO, said a half-point cut by the Fed is far from certain given its recent history of not taking making major policy moves unless the economy showed major signs of deterioration like the onset of the COVID-19 pandemic or the 2008 Global Financial Crisis. He stressed, though, that any policy move by the Fed that starts the downward phase of cuts will give the CRE market a much-needed jolt.

“Cutting rates is going to be like a performance-enhancing drug for commercial real estate returns,” Severino said “That is a strong enough signal to investors to say we’re going to be in a phase where rates are going to be coming down, the cost of debt is going to be coming down and pricing is going to adjust so we can go out and be more aggressive than we were willing to be six  to 12 months ago.” 

Severino said a soft landing remains possible — where the economy avoids a recession while still having inflation at the Fed’s 2 percent target — but that the window for the central bank to act is quickly closing. He also said the Fed could give the market a lift this week by indicating it plans to cut rates if necessary.

The most recent baseline forecast from Moody’s — as of July 15 — forecasts a soft landing scenario with unemployment expected to be in the low 4 percent range over the next two years and gross domestic growth of around 2 percent in the same period. Moody’s is projecting two rate cuts totaling 50 bps for the remainder of the year based on its July 15 data. 

Nick Villa, an economist at Moody’s, said that while a half-point cut would have more of an impact on the CRE market than a quarter-point cut, both would be “pretty immaterial” given how elevated borrowing levels are now. He noted, though, that even expectations of a near-term downward shift by the Fed with rates could have a positive effect on jump-starting more CRE transactions late this year.

Renewed concerns over the last few days about a possible recession have spurred some economists — including Jeremy Siegel, professor emeritus of finance at University of Pennsylvania’s Wharton School — to call on the Fed to make an emergency rate cut prior to the September meeting. The Fed historically only holds unscheduled meetings to implement monetary policy changes in emergency economic scenarios, which last occurred in March 2020 at the beginning of the COVID-19 pandemic. back then, the central bank cut rates to  near zero, causing global markets to tumble.

“If they were to contemplate doing that I think they would probably be basing that off of the initial jobless claims numbers because that’s a high frequency number that we get every week,” Villa said. “More likely than not, they’re just going to wait until September and proceed along those lines and then it’s the question of is it 50 or 25 basis points.” 

Matt Sharp, co-founder and managing principal of Hamilton Point Investments, a CRE private equity firm, said he is against the option of an emergency rate cut since such a drastic action would likely lead to more market turmoil. He said his firm is preparing for at least two rate cuts soon by pricing in a 50 basis point estimate to its debt costs this fall.  

Sharp said speculation that interest rates will start to come down more aggressively late this year will help spark more sponsors to sell their assets, especially in the multifamily sector.

“If rates go down 50 basis points, we, and I bet you a lot of other people who are in the same position who have properties that are ready to sell, will put properties on the market,” Sharp said. “I think it could add a bunch of stabilized properties to the commercial real estate market that’s for sale again.”

Until then, Sen. Warren made clear what she would like to see from the Fed to stave off more market calamity and economic uncertainty. “The jobs data is flashing red,” Warren wrote on Friday.  “Powell needs to cancel his summer vacation and cut rates now — not wait six weeks.” 

Andrew Coen can be reached at acoen@commercialobserver.com