Economic Watch: Fed Holds Rates Steady; Still Expects Three Cuts This Year

Executive Summary

• The Federal Reserve kept the federal funds rate at a range of 5.25% to 5.5% today but indicated it still expects to make three quarter-percentage-point cuts by year-end.
• The Fed revised its forecast for 2024 GDP growth to 2.1% from 1.4% and maintained its forecast inflation rate of 2.4% by year-end.
• While the Fed expects that GDP growth and inflation will become more balanced by year-end, it remains attentive to inflation risks. CBRE expects that the central bank will make the first quarter-point rate cut in June.
• High interest rates and economic uncertainty will keep real estate capital markets activity subdued in the first half of 2024. We expect that investment activity will pick up later in the year as markets fully reprice amid greater interest rate certainty.
• Leasing activity will likely remain relatively resilient as economic growth outpaces expectations.

The Bottom Line

The prospect of higher inflation in coming months will likely cause volatility in financial markets. However, CBRE expects inflation will ease toward the Fed’s 2% target as the year progresses. While it’s too early for the Fed to declare victory on inflation, forward indicators point toward softening in the labor market. This should give the Fed confidence to make its first rate cut in June. With two additional rate cuts expected this year, CBRE forecasts that the federal funds rate will end the year at a range of 4.50% to 4.75%, while the 10-year Treasury yield is expected to fall to 3.7% from about 4.3% currently.

High interest rates will constrain investment activity in the first half of the year, but a June rate cut will improve investor sentiment and set the stage for a modest recovery in property sales during the second half of 2024. Continued resilience in the economy will be a tailwind for leasing activity.

Figure 1: CBRE House View

Economic Watch: Fed Holds Rates Steady; Still Expects Three Cuts This Year