This week, the Federal Open Market Committee (FOMC) delivered an interest rate hike for the first time in over two years, the first hike under Kevin Warsh, ending a long stretch of the central bank holding rates steady while it watched growth, jobs and inflation for signs of where the economy was actually headed.
A new Fed Chair’s first rate decision is read as closely for what it does as for what it signals. Here’s what this piece covers:
- The three reasons behind the hike: a strong but uneven growth picture, a labor market weaker than headlines suggest and geopolitical pressure
- What’s really driving the decision: why geopolitical risk appears to be the deciding factor
- What happens next: the FOMC forecasts and what would push the Fed toward another hike
- What it means for Commercial Real Estate: mortgage rates, their impact on multifamily occupancy and rent growth and the outlook for cap rates and transactions
The Three Reasons Behind the Hike
First, Warsh pointed to a somewhat stronger economy and balanced risks to the labor market. In fact, Gross Domestic Product (GDP) is likely to accelerate from an average of 1.8% annualized to possible 4% or above on that same basis. Yet, much of that acceleration will come from a period of restocking inventories from atypically low levels in recent quarters, not necessarily from a significant change in momentum from key areas like personal consumption or construction. If the growth spurt proves to be short lived, then we may experience a resumption of trend growth immediately thereafter. As for labor markets, despite the steady unemployment rate, the August payroll report was likely flattered by technical factors. Beneath that report was one of the weakest raw August labor counts in recent memory. Excluding August, the prior three months only saw job creation at an average of 38K per month, quite weak by any measure.
Turning to inflation, the three-month average of the Fed’s preferred inflation rate is running about 3% on a yearly basis, above the central bank’s 2% target, which it has been for some time. Yet, the recent inflation trend is lower than the three-month trend immediately preceding it, so inflation actually slowed modestly over the summer.
Finally, the Fed Chair cited geopolitical conditions as a third reason for the rate increase. This seems to be the most significant rationale for FOMC adjusted rates. Due to tensions in the Middle East, surging energy prices, and global trade uncertainties, the risk seems to have tilted to the upside on inflation. Second and third effects in prices are a real concern, even if they haven’t appeared to date. In addition, open market interest rates have been gradually climbing since March, in part challenging both the Fed credibility on inflation and the Administration on fiscal spending.
It seems this third and final reason is what likely pushed the open market committee toward a rate hike instead of the wait and see approach that has carried recent months.
What Comes Next
Now consider the economic and inflation outlook from Fed policymakers themselves, excluding the Chairman, who does not contribute to the forecasts. There’s a familiar inconsistency here, the same one that has caused the Fed to miss its inflation target year after year. FOMC members raised their economic growth expectations for the next 2-3 years, lowered the unemployment forecast, and over that same period cut the inflation forecast almost in half. That’s overly optimistic based on economic theory and experience, absent a genuinely unexpected supply-side shock to the upside or a large jump in productivity. Neither seems likely at that scale, though improved productivity gains from AI should be expected in the quarters and years ahead, which should depress inflation in a noticeable way. Whether or not it can cut inflation in half, however, remains to be seen.
To summarize, the FOMC raised rates to buy time, to see how the growth trend settles once the inventory rebuild fades, and how long the energy price shock takes to work through second and third order inflation effects. It seems it will take until year-end before monetary policy makers and economic observers can make an assessment on those two factors. In the meantime, if consumer spending becomes resurgent and energy costs result in a widening of inflation, then the FOMC could move rates again. On the other hand, if energy costs decline along with Middle East tensions, and the inventory surge passes (with economic growth retreating back) then the committee can wait until the Fed Chair’s task forces report back in December. This will allow the central bank to articulate to the public its more accurate compass that will guide monetary policy in 2027 and beyond.
What Does This Mean for CRE?
The impact to the broader CRE market has been evident since the Fed telegraphed the rate hike over the last several weeks. The 30-year fixed rate mortgage averaged 6.95% as of September 17th, up from 6.76% a week prior. Elevated mortgage rates have weighed on home sales, which have been weaker throughout 2026 and will likely continue due to affordability concerns. A less dynamic residential housing market will keep multifamily occupancy and retention higher, but typically comes at a trade off of slightly lower rent growth. The immediate impact of one rate hike may not immediately translate into higher cap rates, but a market weighing additional rate hikes throughout the year could put upward pressure on cap rates over tine. Multifamily operators and allocators are likely inclined to hold off on dispositions until a clearer path comes from the Fed.
