September 18, 2019

Executive Summary

  • The Federal Reserve cut the federal funds rate by a quarter percentage point today, marking a reduction of 50 bps since July.
  • The target range for the federal funds rate now stands at 1.75% to 2.0%.
  • Additional rate reductions are anticipated over the coming quarters as conditions warrant.
  • Officials also cut interest rates on excess reserves by 30 bps to 1.8%.
  • The U.S. economy remains resilient, though risks to the outlook are mounting.

Fed Policy Stance & Outlook

The Federal Reserve reduced the federal funds rate by 25 basis points (bps) today, bringing the target range down to 1.75% to 2.0%. With this reduction, monetary authorities are moving to mitigate the negative effects of various risk factors—largely external—that continue to mount. Additionally, the interest rate on excess reserves was reduced to 1.8%—representing a decrease of 30 bps—to alleviate stress in short-term lending markets.

The global economic picture has continued to become more clouded as growth slows in large economies across Europe and Asia. Ongoing trade disputes—along with Brexit, heightened Middle East tensions and other geopolitical risks—are weighing on economic growth. In the U.S., inflation remains subdued—giving the Fed flexibility to take a more accommodative policy stance—and both GDP and employment growth have slowed. Today’s rate cut reflects the Fed’s response to an evolving economic landscape.

Implications for CRE

The economic and geopolitical uncertainty is negatively impacting cross-border transaction volumes. Still, H1 2019 transaction volumes remained healthy and in line with the pace of activity over the past three years. Additionally, today’s interest rate reduction will support economic fundamentals and should translate into lower borrowing costs. Furthermore, recent stress in the short-term lending markets—largely due to technical issues—are likely to dissipate as the Fed cut interest rates on excess reserves and can inject liquidity as needed. Further reductions in short-term interest rates would also help alleviate liquidity issues in short-term markets.

Figure 1: Total U.S. Investment Volume

Fed Cuts Key Interest Rate for Second Time This Year Fig 1

Source: CBRE Research. Real Capital Analytics, Q2 2019.
*Reflects H1 2019 transaction volume.

In summary, today’s action will help ensure continued stability for property markets during the coming quarters even as risk factors continue to mount. Looking ahead, CBRE expects economic growth to continue slowing during the coming quarters. Consequently, additional interest rate reductions are likely. These moves should bolster real estate market fundamentals and investment activity.

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