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The Federal Open Market Committee (FOMC) kept the target range for the federal funds rate at 4.25% to 4.50% at its June meeting. Rates have held steady in 2025, following 100 basis points of rate cuts 2024 and a series of rate hikes in 2022 and 2023.
“Interest rates have experienced some volatility year to date, as expectations for growth and inflation have shifted a few times given heightened policy uncertainty, mostly around trade and tariffs,” said Ginger Chambless, Head of research for Commercial Banking at J.P. Morgan. “There’s also focus on government spending and borrowing needs over the coming years, especially following the Moody’s downgrade of U.S. debt in May.”
Evolving conflicts in the Middle East could further fuel uncertainty.
The Fed has made clear its current stance on monetary policy makes it well positioned to quickly respond to economic developments. “We expect the Fed to remain independent in its decision making and focused on the incoming data around inflation and labor markets,” Chambless said.
Here are a few things to keep in mind about the rate environment.
“The bond market craves certainty and stability. Instead, it has had to deal with uncertainty and chaos over the last several months,” said Mike Kraft, Commercial Real Estate Treasurer for Commercial Banking at J.P. Morgan.
“The on-again, off-again status of tariffs—whether imposed, postponed or merely threatened—makes it difficult for analysts and the market to form a satisfactory view of the economy’s evolution and the level of future inflation. That is felt most acutely in the realm of medium- and long-term Treasury yields,” he said.
As always, it’s important to differentiate between short- and long-term interest rates and how the Fed’s actions impact each.
“If inflation remains tame and the labor market softens, the Fed’s economic projections indicate that they foresee the need to lower rates twice in 2025,” Kraft said. As of July 3, Fed funds futures imply a 70% chance of a rate cut at the September FOMC meeting, and another one by year end.
“The concern is that both tariffs and fiscal policy may be inflationary which—if severe enough—could delay accommodative action by the Fed,” Kraft said.
The cost of tariffs could be passed to producers and consumers in the form of higher prices, causing measures of inflation to rise. “Higher inflation would likely result in stable to higher interest rates as the FOMC might deem it appropriate to stay on pause for longer or hike interest rates to curb inflation,” Chambless said.
“Higher inflation would likely result in stable to higher interest rates as the FOMC might deem it appropriate to stay on pause for longer,” Chambless said.
A recession could have wide-ranging impacts on multifamily and other commercial real estate assets. An economic downturn could also impact interest rates.
“Typically, interest rates decrease in a recessionary environment,” Chambless said. “How quickly rates drop and to what degree depends on how high inflation is running and the severity of an economic slowdown."
“In the event of stagflation—a recession accompanied by higher prices—the situation becomes more complex, and creates more challenges for decision-making by the Fed,” Kraft said.
The Fed would ultimately need to decide at the time which risk—higher inflation or lower employment—demands their immediate attention.
Amid economic uncertainty, real estate investors may consider hedging options. Before you decide to hedge against interest rates, you should:
While interest rates have a unique influence on commercial real estate, it’s important to look at multiple economic factors, including:
It’s also important to consider factors specific to commercial real estate, such as location, asset class and cap rates, as well as demographic shifts and supply and demand.
In an uncertain interest rate environment, it’s important to stay on top of commercial real estate trends.
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