Federal Reserve Rate Drop, What Does It Mean?
On Tuesday, October 29th, Federal Reserve Chairman Jerome Powell announced a 25-basis-point rate cut to the federal funds target rate.
So, what does this mean for the near-term outlook of commercial real estate lending?
While the U.S. 5-year and 10-year Treasury yields—the benchmarks most commonly used for commercial mortgages—are not directly tied to the federal funds rate, they often move in correlation, typically with added volatility and a spread.
This marks the second rate cut of the year, bringing rates to their lowest level in three years, which is generally positive news for borrowers. Over the past year, we’ve already seen relief in Treasury yields, which have been trending downward overall. In fact, markets often price in anticipated Fed decisions weeks in advance, and I’ve noticed this pattern in each of the last three meetings.
Following each announcement, however, Treasury rates tend to tick upward temporarily, reacting to subsequent economic data—particularly labor market strength and inflation indicators. Despite these short-term fluctuations, I expect Treasury yields to trend downward again in the near future, though likely only if the market begins to anticipate another rate cut from the Fed.
Historically, the federal funds rate tends to stabilize around current levels or slightly lower. I don’t expect massive rate reductions ahead unless the economy experiences a significant changes.
For now, borrowing conditions are more favorable than they’ve been in several years. It’s a great time to secure long-term debt or refinance, given the current rate environment. As history has shown us—through events like the 2008 financial crisis and the 2020 pandemic—lending conditions can change rapidly. Understanding how rates behaved during those times can help investors make smarter, long-term decisions today.
