Fed Cuts Interest Rates Again but Signals Slowdown on Reductions in 2025.

Moves next year could have major effects on real estate and the broader economy.

Federal Reserve Chair Jerome Powell speaks Wednesday after announcing a quarter-percentage-point cut to the interest rate. (Getty Images)

The U.S. Federal Reserve made its third reduction to the interest rate in recent months but signaled a slowdown in cuts ahead in 2025 as inflation lingers, adding to long-term uncertainty for the real estate industry and the broader economy.

The Fed said it is cutting the rate by a quarter-percentage point, falling within the range of 4.25% and 4.5%, while acknowledging that the long-term economic outlook is uncertain.

The U.S. central bank’s latest decision comes as economists differ on how many further cuts might be necessary, and as former President Donald Trump is set to retake office for a second term early next year. Trump’s economic policies, including threats of significant tariffs and crackdowns on immigration, add further uncertainty to the long-term economic picture.

Throughout the evolving interest-rate environment, Powell has emphasized the “dual mandate” of maximizing U.S. employment while keeping the inflation rate around 2% for the long term.

Any changes to the country’s benchmark interest rate have the potential to significantly affect real estate and the broader economy. U.S. stocks plunged after Powell spoke Wednesday.

“It’s surprising to me that the market didn’t expect that,” said David Scherer, co-CEO of Chicago-based multifamily investor, debt investor, and lender Origin Investments. “The market is behaving as if this is new information, but it really isn’t. This was expected.”

Preceding cuts

Wednesday’s announcement follows a long-anticipated half-percentage-point cut in September, which was widely applauded by property owners and other industry professionals, and a quarter-point reduction in November.

Those moves followed 11 increases from early 2022 to mid-2023 to counter inflation. Those higher borrowing costs slowed the pace of commercial property sales and developments throughout the country while pushing down values.

“With today’s action, we have lowered our policy rate by a full percentage point from its peak, and our policy stance is now significantly less restrictive,” Powell said at a news conference. “We can therefore be more cautious as we consider further adjustments to our policy rate. We know that reducing policy restraint too fast or too much could hinder progress on inflation. At the same time, reducing policy restraint too slowly or too little could unduly weaken economic activity and employment.”

The latest rate cut, and potential future ones, are likely to affect real estate values differently depending on factors such as location and property sector.

"While the Fed's 25-basis-point cut is welcome news, we're seeing a bifurcated commercial real estate market where high-quality assets continue to attract capital while challenged properties face refinancing hurdles. The Fed's likely pause after this cut suggests we're entering a period where property fundamentals, rather than monetary policy, will drive market activity,” Raj Aidasani, managing director at the real estate finance trade association CRE Finance Council, said in an email to CoStar News. “We anticipate a gradual improvement in financing conditions, particularly for strong sponsors in favored asset classes. However, challenges persist in sectors like office, where structural shifts continue to impact demand."

Global inflation

Policymakers throughout the world also have been wrestling with how to cool inflation without harming the economy.

The Bank of England, which made its second interest-rate cut in more than four years in November, announced Thursday it will hold its rate at 4.75%.

Canada’s central bank last week delivered its fifth cut of the year, down to 3.25%, with some real estate professionals still urging further cuts.

“The U.S. economy is just performing very, very well, substantially better than our global peer group,” Powell said. “There’s no reason to think a downturn is any more likely than it usually is. The outlook for the economy is pretty bright. We have to stay on task, though, and continue to have restrictive policies so that we can get inflation down to 2%. We’re also going to be looking out for the labor market. We want to keep the labor market pretty close to where it is.”

Trump has openly criticized Powell, who after last month’s interest-rate announcement stressed that he had no intention of stepping down, even if asked to do so by Trump. Powell said at the time that attempts by a president to force him out would be “not permitted under the law."

Eleven of the Federal Open Market Committee members, including Powell, voted to approve the latest interest-rate reduction. The member who voted against it, Cleveland Fed President Beth Hammack, preferred to maintain the previous range of 4.5% to 4.75%.

‘Closer call’

Powell said “today was a closer call” than other recent decisions to cut the rate, but he said it was the right decision to balance the labor market and inflation. But he said FOMC members’ caution related to potential future cuts was justified given uncertainty about continued inflation concerns.

“It’s not unlike driving on a foggy night or walking into a dark room full of furniture,” Powell said. “You just slow down."

Though real estate professionals have largely cheered rate cuts, Scherer said he would have preferred to keep the status quo with a presidential change and other unknowns on the horizon.

“It’s too early,” Scherer said. “There are inputs that we don’t know. With President-elect Trump, we don’t know what tariffs will look like, how deportations might affect the labor market, or how extending tax cuts will affect bond markets.

“That’s why I wouldn’t have cut rates today. I would have waited. It’s very much a wait-and-see for the next few months.”

This story was updated Thursday to say the Bank of England decided to hold its rate at 4.75%. CoStar News reporter Mark Heschmeyer contributed.