What the Federal Reserve interest rate cut means for Georgia

Like a big ship reversing course, the Federal Reserve on Wednesday announced it has changed the direction of its money policies for the first time in more than two years — an announcement warmly greeted by a sampling of Atlanta-area business people.

The Fed’s Open Market Committee, which meets roughly eight times a year to set monetary policy, concluded its two-day session by announcing a half-point cut to the Federal Funds Rate.

That was a larger cut than expected, but even so, it won’t immediately and dramatically change what consumers and companies pay to borrow.

What it does is send a loud message.

“There’s almost some psychological element to a rate cut,” said Porter McDonald, a managing director at Atlanta-based apartment developer Landmark Properties. “The rate cut, we hope, is an important impetus for capital that we feel has been amassed to be deployed into housing.”

In other words, money parked on the sidelines might soon start flowing into deals.

Credit: John Spink

Credit: John Spink

The Fed’s benchmark controls rates charged to huge banks for overnight loans, who use it to set rates for further lending. The rate ripples through the economy to shape the rates charged on mortgages, auto loans, business loans, credit cards and virtually all other kinds of borrowing.

During several coronavirus pandemic-defined years, the Fed — fearing economic disaster — kept its benchmark rate effectively near zero to lighten debt loads on consumers and companies alike.

But then inflation took off as consumers, hunkered down from the pandemic, started buying things and going places again.

Starting in March 2022, the Fed launched the most aggressive rate-hike campaign on record, lifting the effective rate to 5.33% in a series of 11 steps ending in August 2023. The idea was to make borrowing more costly, which would slow economic growth and keep prices from rising so fast.

Fed officials said they hoped to take the wind out of inflation’s sails without sinking the economy.

The latest government figures show inflation nearly as low as it was pre-pandemic, and growth decelerating. That has sparked new worries about recession, leading Fed Chairman Jerome Powell to pivot toward rate cuts.

Commercial real estate is among the sectors where executives have been fretting about rates and watching the Fed carefully.

A lot of investor money has been piling up, readying for new opportunities, and lower rates will open the spigot, said Brad Sinclair, a principal and managing director over capital markets and hospitality at real estate services firm Avison Young.

A half-point cut “sets us up for a fantastic 2025,” he said. “I think 2025 is going to look a lot better than 2023 and 2024 has and (this rate cut) will continue the optimism that we seem to have right now.”

Still, not everyone expects an economic surge.

Short term, the impact is going to “muted,” said Chuck Taylor, managing director of real estate investment at Domain Capital Group, an Atlanta-based investment consulting firm. “I don’t think all of a sudden deals that didn’t make sense yesterday are going to all of a sudden make sense.”

The hope is that the Fed continues on a course to ever-easier money, he said. “If they follow through (with more cuts), it will have a meaningful impact a year from now.”

Borrowing costs matter, but commercial real estate faces a number of issues, like the changes in where people work, that have little to do with interest rates, said Lynn McKee, director of Georgia State University’s commercial real estate master’s program.

“While lower interest rates will help the (commercial real estate) market, it’s not going to solve all its problems,” he said. The cut “is no ‘silver bullet’ to what currently ails the market, which is overvaluation from years of abnormally low interest rates.”

Credit: J. Scott Trubey

The Fed’s moves have also roiled the residential market. Mortgage rates, which had been well below 3%, jumped, cresting at nearly 8% last fall, even if they’ve been sliding of late.

High rates, which made monthly payments more costly, discouraged some buyers, while also “locking in” many owners who did not want to give up a low rate and take on a higher one in a new residence.

Dusty Talbert, marketing director of the Providence Group, a development company selling condos, townhomes and single family houses, said buyers are especially sensitive to how much fluctuations in rates affect their monthly payments on a mortgage.

A half-point change on a $500,000 loan means roughly $160 a month. So, rate cuts will likely have a rapid impact, he said.

“I think it will be huge,” Talbert said. “I think it will bring a lot more buyers into the market who have been waiting it out.”

This week, the average 30-year fixed-rate mortgage was down to 6.1%, according to Atlanta-based Intercontinental Exchange. ICE estimates that 2.9 million mortgage holders took out the loans in the past two years, so that many can now refinance the loan for a lower rate.

“The fog may finally be clearing on the refinance market,” said Andy Walden, ICE vice president of research and analysis. “They would be able to refinance and improve their payments.”