The Federal Reserve has slashed a key short-term interest rate by one-quarter percent, bringing the rate to its lowest level in nearly 50 years. That one-quarter percent cut was conservative: many observers predicted that the Fed would bring rates down by an aggressive half percent. The funds rate — which is the interest banks charge each other on overnight loans — is the Fed’s primary lever for boosting the economy.
This latest cut was No. 13 since January 2001. The Fed released a statement yesterday saying that "the economy….has yet to exhibitgrowth." Many see this latest rate reduction as the Fed’s way of warding off deflation, which is deemed possible in this weak economy. Deflation, were it to occur again, could have a brutal effect on real estate prices. The Fed’s next meeting is scheduled for August 12.
What does this rate cut mean for commercial real estate? Not much, says one industry source. "This won’t spur a big change — rates have already been so low for so long," says Jon Caplan, a senior director at Cushman & Wakefield’s Manhattan.
The cut may have been prompted by sluggish economic growth in the first quarter. The Commerce Department reports today that the U.S economy grew only 1.4% in that period. Meanwhile, the final reading on gross domestic product in the January to March quarter was lower than the 1.9% growth rate that was projected last month.
Economic outlooks for the April through June quarter aren’t projected to be much better than the first quarter’s anemic performance. In fact, this quarter could end up being far worse according to published reports: GDP forecasts for the second quarter are hovering in the 1% to 2% range.
The root cause of 2003’s weak economy thus far has been the lack of businesses spending capital and hiring new staff, two components of a healthy economy that have yet to surface. The consumer has carried the economy by consistently spending money, but economists fear that another few months of layoffs and gloomy economic reports could cause consumers to slow their spending.