The Federal Reserve lowered its benchmark interest rate by a quarter percentage point — its second cut this year — bringing it to its lowest range in three years.
The central bank said Wednesday that it lowered the interest rate to the 3.75% to 4% target range as "uncertainty about the economic outlook remains elevated." The last time the Fed had the interest rate in this target range was November 2022.
The challenge for Federal Reserve officials has been determining their next move as they remain committed to their goal of bringing inflation down to 2%, and as the government shutdown, now nearing a month, has left them with little official economic data to guide interest rate decisions for the remainder of the year.
"In the committee's discussions at this meeting, there were strongly differing views about how to proceed in December," Federal Reserve Chair Jerome Powell said during the press conference Wednesday. "A further reduction in the policy rate at the December meeting is not a foregone conclusion, far from it."
Still, real estate professionals see the Fed's latest move as a potential step toward easing borrowing costs and unlocking more commercial deals and forging a more affordable path toward homeownership.
But the central bank faces a major hurdle: The lack of government data has made it harder to assess the strength of the labor market. Powell has suggested that employment would be a more important barometer for future interest rate decisions than elevated levels of inflation.
"If you ask me, could it affect the December meeting, I’m not saying it’s going to, but, yeah, you could imagine that. What do you do if you’re driving in the fog? You slow down," Powell said at the press conference.
The U.S. unemployment rate reached 4.3% in August, up from 3.4% in the spring 2023. Layoffs are up 66% year over year, reaching the highest level since 2020, according to data from Challenger, Gray & Christmas.
While a divided group of policymakers, in a 10-2 vote, moved forward with the second rate cut this year, that doesn’t mean they are anywhere near united in how they view the outlook for rates.
Stephen Miran voted against the October rate cut. He wanted to lower the target range for the federal funds rate by a half percentage point. Kansas City Fed president Jeffrey Schmid wanted no cut at all.
Last month, the median projection from policymakers suggested another quarter percentage point rate cut before the end of the year and one more next year. September's reduction was the Fed's first rate cut in nine months, following troubling signs of weakness in the labor market.
Commercial real estate leaders are encouraged
Professionals in the commercial real estate industry noted that the Fed’s decision to double down on lowering the cost to borrow is a reassuring signal that its cut last month was not a one-off.
“While the September rate cut provided a much needed sense of direction from the Fed, a single 25-basis-point cut wasn’t going to be a panacea for the market," Marion Jones, a principal and the executive managing director of U.S. capital markets at Avison Young, told CoStar News via email. "The October rate cut signals to investors a greater sense of conviction in the Fed’s direction and will help fuel decision-making that has been long postponed.”
Others told CoStar News that the trend to lower the interest rate is much needed and constructive for development and that existing property owners are leveraging the opportunity to refinance existing debt, resulting in reduced defaults and the stabilizing of previously stalled or partially completed projects.
Senior Executive Vice President and Chief Real Estate Lending Officer of EagleBank Ryan Riel told CoStar News via email that the rate cut “is exactly the kind of action that’s needed for the D.C. regional economy” and that his team is already seeing an uptick in activity since the cut last month.
For example, Newmark announced earlier this month that it had arranged a $67.5 million loan on behalf of Sentinel Real Estate Corp. to refinance Rockwell at Crown, a recently developed 335-unit multifamily community in Gaithersburg, Maryland, just outside the nation’s capital.
“With interest rates beginning to ease and sentiment pointing toward further stability — we are seeing renewed momentum in the market,” Newmark Multifamily Capital Markets Executive Managing Director Jim Badolato, who helped secure the financing through Fannie Mae, said in a statement. “This transaction highlights the increase in both pent up and discretionary refinancings, signaling a broader unlocking of capital markets activity.”
It comes as the Bank of Canada lowered its target overnight rate on Wednesday by a quarter percentage point to 2.25% in a move commercial property professionals expect to boost activity in that market. The rate cut, that central bank's second in less than two months, reflects economic weakness and an inflation rate expected to remain close to a 2% target. In mid-September, the Bank of Canada cut its benchmark lending rate by 25 basis points.
Little impact on data center construction projected
The U.S. interest rate change would probably not have a major impact on constructing data center facilities, which help run artificial intelligence platforms, Powell said at the press conference.
“I don’t think that the spending that happens to build data centers all over the country is especially interest sensitive. It’s based on longer run assessments that this is an area where there’s going to be a lot of investment,” he said. Data center construction is especially high in areas of the country like Northern Virginia.
The Fed chair acknowledged that demand for workers has gone down.
Tech giant Amazon announced this week that it would reduce its workforce by 14,000, creating a leaner organization looking to rely more on “transformative” tools like AI.
"The weakening hiring environment and a raft of recent layoff announcements by major US companies have put the labor market front and center in the Fed’s focus, so to see it move to cut its policy rate was not a surprise," Christine Cooper, the chief U.S. economist at CoStar Group, said via email.
Survey results indicate optimism ahead
As the industry turns toward next year, surveys said the outlook appears favorable, with expectations of improved capital market conditions.
The commercial real estate development association NAIOP said in a report released this month that an expectation of declining interest rates is helping drive a rebound and that respondents predict construction material costs will increase much less sharply over the next 12 months than was the case earlier this year.
Despite a slight dip, sentiment from a survey by professional services group Deloitte published at the end of September also indicated that commercial real estate professionals remain optimistic about where the industry is headed in 2026. The survey, conducted over the summer, collected input from more than 850 global chief executives and their direct reports at major real estate owner and investor organizations across 13 countries.
A total of 83% of respondents expect their revenues to improve by the end of the year compared with 88% last year, and many still expect all conditions surveyed — like rental rates, leasing activity, vacancies and cost of capital — to improve through 2026 (65%), compared with last year (68%).
Economic data drought clouds decision-making
"Available indicators suggest that economic activity has been expanding at a moderate pace," the Fed said in a statement.
Typically, economic reports released between Fed meetings help bridge the gap among policymakers. But with no fresh labor market data available, officials have been left without key insights that might otherwise help resolve internal debates.
Since the Fed’s last policy meeting, the consumer price index rose by less than expected in September, but the core measure, which is a more reliable indicator of underlying price pressures — climbed 3% from a year earlier, remaining a full percentage point above the Federal Reserve’s target.
Powell recognized that "inflation remains elevated," but noted that the job market has softened.
Some officials continue to highlight stubbornly high price increases in the services sector, which should be less affected by tariffs. However, recent threats of new levies against China and Canada have brought new uncertainties about prices and a slowing economy.
The economic landscape heading into 2026 will bring its own set of challenges. Elevated tariffs remain a concern, with economists warning that they could continue to exert upward pressure on inflation, potentially undermining the Fed’s efforts to ease monetary policy.
Powell said consumers should expect “some price increases” due to tariff pressures, adding that there’s “no risk-free policy to meet their goals.”
Fed to stop shrinking its balance sheet
The Federal Reserve announced Wednesday that it will stop shrinking its $6.6 trillion balance sheet starting Dec. 1. The decision comes as signs emerge that money market liquidity is tightening and bank reserves are falling, conditions that could make borrowing more difficult for everyday consumers and businesses if left unchecked.
In October, Powell signaled that the Fed will not resume buying mortgage-backed securities as it did during the pandemic. Mortgage-backed securities are bundles of home loans that banks and lenders group and sell to investors. When you make your monthly mortgage payment, it doesn't sit in your bank; instead, your loan is often packaged with thousands of others and sold as an investment. Investors who purchase these loans receive payments as homeowners pay their monthly bills. This system enables banks to recoup the capital they have lent, allowing them to offer more mortgages.
This push to unwind the balance sheet follows years of expansion. In response to the 2008 financial crisis and again during the COVID-19 pandemic, the Fed purchased large quantities of Treasury and agency mortgage-backed securities — a strategy known as "quantitative easing" — to keep borrowing costs low. Those purchases helped lower mortgage rates, which triggered a purchasing frenzy as homebuying became more affordable.
However, Powell said the central bank remains focused on trimming its more than $6 trillion in holdings, including roughly $2 trillion in mortgage-backed securities, as part of that effort.
Fed Vice Chair Michelle Bowman has supported the Fed reduction in holdings to minimize its “footprint in the money markets and Treasury markets” as much as possible.
Meanwhile, some bond experts at PIMCO, one of the world’s largest bond investment firms, argue that the Fed could reduce mortgage rates by 20 to 30 basis points by reinvesting the roughly $18 billion in mortgage-backed securities that mature each month.
PIMCO's investment experts say the impact would be equivalent to a full percentage point cut in the Fed’s benchmark interest rate. With a more aggressive approach, the Fed could lower mortgage rates by up to 50 basis points by selling off older mortgage-backed securities each month and using the funds to purchase newly issued ones.
Is this a turning point for housing?
Mortgage rates are finally easing again, but not enough to push them lower than 6%. According to Freddie Mac, mortgage rates dipped to 6.19% last week — their lowest level in over a year — as investors anticipated further interest rate cuts by the Federal Reserve. However, October’s rate cut doesn’t guarantee mortgage rates will continue to fall.
The Federal Reserve raises interest rates to curb inflation and lowers them to support job growth, reflecting its dual mandate of promoting price stability and maximum employment.
Remember the Fed doesn’t set mortgage rates directly. Instead, it controls the short-term federal funds rate — the rate banks charge one another for loans. When the Fed signals changes in that rate, it can influence long-term borrowing costs, including mortgage rates.
Even with recent rate relief, home prices remain another obstacle. Data from the Federal Reserve Bank of St. Louis shows the median single-family home price rose from $208,400 in 2009 to $410,800 in the second quarter of this year, nearly doubling in 15 years.
"Things appear to be progressing in a similar fashion to the Fed’s last cut,” Carl Gomez, senior economist at Homes.com, said after the announcement.
Mortgage rates typically track the 10-year Treasury yield, which serves as a benchmark for long-term borrowing costs. After the Fed’s rate cut this October, the 10-year yield rose by 7 basis points to 4.054% — a sign that investors remain cautious about the direction of interest rates.
“Bond yields, which underpin most mortgage rates, drifted slightly higher following the Fed’s announcement likely because the bond market believes further rate cuts are far from certain," Gomez said.
"The net result so far is that the underlying cost of borrowing and affordability appears little changed even after two Fed cuts," the economist added.
Fed leadership changes could alter voting dynamics
The lineup at the Federal Reserve could alter the course of monetary policy next year.
Fed Chair Jerome Powell’s four-year term is set to expire in May, but he could remain on the board until early 2028. He has not indicated whether he plans to leave the Fed when his time at the helm expires.
Meanwhile, Stephen Miran — who was a top economic advisor to President Donald Trump — joined the Board in September following his Senate confirmation. His term runs through January 2026, but his seat is widely expected to be filled by Trump’s next nominee for Fed chair.
Adding to the uncertainty is the ongoing legal battle involving Fed Governor Lisa Cook. Trump has attempted to remove her from the board over allegations of mortgage fraud, but lower courts have blocked those efforts. The Supreme Court is scheduled to hear arguments in January, allowing Cook to remain in her position for now. The high court's decision could shift the Fed’s voting dynamics in the coming year.
Moreover, the Trump administration is closing in on its choice to lead the Federal Reserve next year, with Treasury Secretary Scott Bessent confirming five finalists: current Fed board members Christopher Waller and Michelle Bowman, former Fed governor Kevin Warsh, White House National Economic Council Director Kevin Hassett and BlackRock executive Rick Rieder.
Deliberations remain fluid, but Trump is expected to name his pick for a replacement as soon as December.