REAL ESTATE NEWS

Immediately after the election, many on Wall Street were delighted. Stock indexes jumped, with the S&P 500, Dow Industrial Average, and Nasdaq all hit 52-week highs. Yields on the 10-year rose, meaning prices fell, which typically happens with inverse movements between bonds and equities.

And then they started to fall last week.

The trigger wasn’t a typical economic release. Rather, it was speeches from two Federal Reserve officials: Chair Jerome Powell on how rate cuts may not follow the pace many might want and Governor Adriana Kugler, addressing the need for an independent central bank. Between the two, it was the effect that one-time Fed Chair William McChesney Martin mentioned in a speech, “The Federal Reserve, as one writer put it, after the recent increase in the discount rate, is in the position of the chaperone who has ordered the punch bowl removed just when the party was really warming up.”

Or, as Bloomberg wrote, “stock investors sobered up.” So did many others.

Powell’s talk at the Federal Reserve Bank of Dallas was a reminder of a point that he and others at the Fed have been making: There is no automatic series of rate cuts acceptable to investors that will happen.

He began by saying the economy is “back to a good place,” with GDP growth at 3% in 2023 and a “stout 2.5% rate so far this year.” Consumer spending growth has remained strong, “supported by increases in disposable income and solid household balance sheets.” Business investment in equipment and intangibles is up and supply conditions continue to improve. There’s been rapid labor force expansion, brisker in the last five years than the 20 years before the pandemic. (Let’s remember, however, that rapid contraction and high unemployment early in the pandemic enabled recovery and accompanying labor growth.) Inflation is down.

But while “confident that with an appropriate recalibration of our policy stance, strength in the economy and the labor market can be maintained, with inflation moving sustainably down to 2 percent,” the Fed is “moving policy over time to a more neutral setting” with a path to arrive there [is] “not preset.”

“The economy is not sending any signals that we need to be in a hurry to lower rates,” Powell said. “The strength we are currently seeing in the economy gives us the ability to approach our decisions carefully.”

Then came Kugler’s address. The background for this goes back to the press conference after the November rate cut when Powell was clear that he didn’t plan to leave his position earlier than the term date in 2026, even if Trump wanted him to resign.

“Gaining control over inflation requires a commitment by society to accept the tradeoffs and sacrifices often needed, and it also requires deliberate and principled decision-making by central banks,” she said. “When there is central bank independence, the role of national or jurisdictional governments is typically one of representing the public in specifying a mandate for the central bank and holding the central bank accountable by monitoring its performance and appointing central bank leadership. In this arrangement, the public, through representative government, specifies the overall objectives that central banks should pursue.”

Put differently, the Fed isn’t about to act like a servant to markets who want lower rates. They aren’t about to promise more rate cuts, which is not what any markets, including CRE, want to hear.

Source: GlobeSt/ALM