Wednesday’s Federal Reserve decision on the federal funds rate closed out 2025’s monetary news with a third cut for the year. But it also had a message that there might be at most one 25-basis-point cut in 2026 and one in 2027.
Equity markets saw some increase. However, the effect on commercial real estate isn’t so clear and might not be for many months. There are multiple reasons, according to BGO Chief Economist and Head of Research in the U.S., Ryan Severino.
The federal funds rate affects much of the global economic world, but it is like an automatic switch. “It’s a very indirect mechanism at least,” Severino tells GlobeSt.com, noting that it can typically take six to 12 months for the effect to filter through the financial systems.
The federal funds rate does affect short-term interest rates faster, which include construction and bridge loans. It can also tie into CRE mortgages that are based on the Secured Overnight Financing Rate, or SOFR. The federal funds rate helps set an upper bound on SOFR.
Even a straight cut comes with interpretation. "Yes, there was a 25 bps cut, but it was one of the most hawkish cuts in years,” JP Conklin, founder of CRE investment consulting firm Pensford, told GlobeSt.com in an email. "Rates aren't entering a cutting cycle yet. Powell effectively said the Fed is done easing unless the labor market weakens materially. That means borrowing costs will remain elevated longer than many CRE owners hoped.” The Fed’s split, and the recognition that President Trump will replace Powell in 2026, creates “more volatility for deal underwriting.”
Longer-term CRE mortgages depend far more on the yield on the 10-year Treasury Note, which doesn’t necessarily follow what the Fed has done. “If there’s something that causes people’s expectations of the long term to change, then you might actually see less of a transmission of what the Fed does and what happens to the 10-year,” Severino says.
He pointed to an example from 2024, when the Fed started cutting rates in September. “You would sit there and say the Fed is cutting and the long-term rates are the short-term rates and they should be reacting.” When Donald Trump won the presidential election, though, the 10-year yield increased.
© Arc, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to TMSalesOperations@arc-network.com. For more information visit Asset & Logo Licensing.