Fed Makes First Interest Rate Cut in Nine Months. Two More Expected Before Year's End.

The U.S. Federal Reserve cut its benchmark interest rate by a quarter-percentage point on Wednesday, the first reduction in nine months.

The median projection from policymakers suggests two more quarter-percentage-point rate cuts before the end of the year, an increase from earlier forecasts.

The central bank moved the interest rate down to the target range of 4% to 4.25%, after holding rates steady for five consecutive meetings this year.

Recent economic indicators — including slowing payroll growth, higher unemployment and warming inflation — have changed the Federal Reserve Board's policy stance. Property professionals view the decision, which wasn't unanimous, as a step toward more commercial dealmaking and lower borrowing costs for prospective homebuyers.

"Changes to government policies continue to evolve, and their effects on the economy remain uncertain," Federal Reserve Chair Jerome Powell said during the Wednesday press conference. "Higher tariffs have begun to push up prices in some categories of goods, but their overall effects on economic activity and inflation remain to be seen."

The Fed took the action as the independent board weathers political pressure and a membership shake-up. President Donald Trump and the head of the Federal Housing Finance Agency have sought to oust a member over alleged mortgage fraud, and a new one was sworn in Tuesday to fill a vacancy.

Fed reacts to slow job creation

"The labor market is really cooling off. That warrants a shift in policy stance," Powell said at the press conference. "Unemployment remains low, but we see downside risks."

His comments came as no surprise. He telegraphed the decision last month, signaling that the economic trajectory was changing in a direction that would call for the central bank to adjust its policy stance.

Since the Fed's last policy meeting, inflation has heated up for the fourth consecutive month, returning to the highest level since the start of the year. At the same time, job creation has stalled, clearing the way for more consensus among policymakers that it's time to make monetary policy less restrictive.

Real estate professionals say the Fed's decision injects a surge of confidence in transaction activity and more favorable conditions for investment on the commercial and residential fronts. At the same time, the singular move won't dramatically move the needle alone, especially as other factors like the effects of tariffs are still shaking out.

The decision came the same day as Canada's central bank cut its key overnight lending rate by a quarter percentage point, to 2.50%, the first cut in six months and in line with investor expectations.

In the United States, analysts and economists are already looking toward the outcome of future Fed meetings.

"Recent evidence that the labor market has been weaker than was earlier expected evidently moved policymakers to focus on the jobs market today, more so than worrying about inflation," Christine Cooper, the chief U.S. economist at CoStar Group, said via email. "Still, inflation has not eased to meet the Fed's target yet, and a rate cut followed by more cuts later this year would be expected to boost growth and add pressure to prices, as the committee's projections show."

"At the same time, Powell expects the impact of tariffs to still fully emerge in higher prices, but the effects have been 'smaller and slower' than anticipated, giving the Fed some space for now to help bolster the labor market, which could easily be at risk of weakening further," Cooper said.

Two more cuts expected this year

Some professionals in the commercial real estate industry were galvanized by the Fed's move, saying it could allow groups to move aggressively back into the market. But others understand that the incremental cut may only marginally create deal momentum.

"The real question is what comes after this cut," Michael Lee, partner with New York-based HKS Real Estate Advisors, told CoStar News via email.

A narrow majority of policymakers sees at least two quarter-point rate cuts by the end of this year, according to the Fed's well-known "dot plot" visualization, which displays the spread of the midpoint of the target range for the federal funds rate. This implies consecutive moves for the next meetings in October and December.

That's higher than what was projected in June, when a majority of the monetary policy group estimated that it would trim borrowing costs only twice by a quarter percentage point by the end of 2025. At least two suggested that one cut would occur, eight said it would happen twice, and another pair predicted it could happen three times. A divergence of views seen in the dot plot this time around, however, could complicate how the Fed acts at future meetings.

"Usually, these smaller changes in interest rates, and especially the ones which are expected, don't have a massive impact because people are adapting to it," JLL CEO Christian Ulbrich told Bloomberg this month. Ulbrich added that going forward, one or two rate cuts this year will support the overall environment for real estate investment, but they would not have a massive impact.