December Pulse Check
Friend,
It seems that the conversation about interest rates is changing â something on everyoneâs holiday wish list.
For over a year now, rates have been rising, and the conversations have been grim. The ten-year UST briefly topped 5% on October 22nd, and there seemed no end in sight. âSurvive until â25â was what developers were saying, and it was almost always offered with a nervous laugh.
Today, the outlook is beginning to change. The ten-year UST is around 4.20% as of this writing. While itâs too soon to talk about an emerging consensus, the market seems to be pricing in rate cuts much sooner than expected, maybe by as much as 175 bps by the end of 2024. For the multifamily industry, lower rates would be welcome. Many of our clients have pipelines full of deals that donât work at current rates but could as rates fall.
Of course, markets donât always get it right. The November jobs report was better than expected, dampening expectations of a rate cut. The Fed has been very clear, having said repeatedly that its inflation target is 2% and that it will do what it takes to get there. And itâs really what the Fed thinks that counts.
Just a few weeks ago, âhigher for longerâ was what all the pundits were saying. Things change quickly. And there is a real risk that the Fed waits too long before easing back on rates. In a recent interview on Marketplace, Austan Goolsbee, president of the Chicago branch of the Federal Reserve, responding to a question about overshooting, keeping rates too high for too long, said this:
Look, itâs definitely of some concern. We just came out of Thanksgiving season.... and [former Federal Reserve Chair] Paul Volcker, my old mentor, was a great turkey cook and took a lot of pride in cooking his turkey. And the thing anybody who cooks a turkey knows is that you got to pull it out of the oven before itâs to the point where you want it to be because itâs going to have residual heat. And if you just keep cooking the thing for too long, theyâre gonna be like, âMommy, why is [the] turkey so hard to chew?â You know, so we definitely should think about that. Weâve been in restrictive territory because weâve got to get inflation down. Thatâs our sacred vow, and weâre going to do it. Once youâŚbelieve that you are on the path to getting inflation to target, then the amount of restrictiveness that you need to apply needs to be lessâŚ.
Letâs hope the Fed takes the turkey out of the oven soon.