Fed Stays Put on Interest Rates, But Uncertainty Looms
Some experts contend that rates' effects on asset performance are overstated.
The Federal Reserve Open Markets Committee elected to keep interest rates the same at the conclusion of its March meeting, at a target range of 4.25 to 4.5 percent. The current Federal funds rate has remained unchanged since last December.
The decision follows consistent reports of a strong, yet slowing economy and even more uncertainty around inflation, particularly as it relates to the Trump administration’s tariff policies on U.S. neighbors and China as well as on steel and aluminum imports. If the Consumer Price Index, currently sitting at 2.8 percent as of February, inches upwards due to higher import taxes, the Fed may face the prospect of stagflation: a weakening economy coinciding with continuing price increases.
These prospects aren’t being felt in a vacuum. The University of Michigan’s March 2025 consumer sentiment index went down to 57.9 percent, its lowest number since November 2022. Survey participants also expect a near doubling of inflation to 4.9 percent by the end of the year. For their part, FOMC participants forecast that inflation will not fall to 2 percent until 2027.
In recognition of these developments at a press conference following the announcement, Fed Chair Jerome Powell highlighted the uncertainty around economic growth, unemployment and inflation. “Uncertainty around the effects and their economic outlook is high. As we parse the information, we are focused on separating the signal from the noise as the outlook evolves.” Powell said. “Ultimately, it is too soon to be seeing significant effects in economic data.”
Additionally, these developments could potentially throw a wrench in the Fed’s plans for rate cuts; of which the Central Bank penciled in two during its December meeting. It’s still possible for the first cut to come in June. The median FOMC participant projects that the funds rate will go down to 3.9 percent at the end of this year, and 3.4 percent at the end of next year.
Playing the waiting game
Most experts remain cautiously optimistic about the prospects for commercial real estate investment, even if it remains too early to gauge the longer-term impacts of the administration’s economic policies.
“While most investors are continuing to underwrite a soft landing from a macro standpoint, we all have our eyes trained on the potential inflationary impact of heightened tariffs, especially as it relates to the cost and availability of building materials,” said Marion Jones, principal & executive managing director of U.S. Capital Markets at Avison Young. “The original inflation target of 2 percent might not be structurally attainable in face of a new tariff environment, and we will have to see how that plays out in the coming weeks and months.”
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Some see interest rates as having an overstated impact on asset valuations. “After the valuation adjustments of the last few years, the asset class doesn’t need lower interest rates, and it is positioned well for a better run,” said Ryan Severino, BGO’s chief economist & head of U.S. research. “The sector still has a chance for incredible performance, but with each passing week that looks less likely.”
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