Skip to content

The Fed shows patience, but moves toward first rate cut


During 12 Jun, US Fed FOMC Meeting, the Fed’s latest economic projections show only one rate cut this year, down from three previously as indicated at the start of the year, as officials again hold rates steady before moving to ease policy.

What happened?

We finally see a decline in US inflation figures for April. Year-over-year inflation and core inflation are 3.4% and 3.6%, respectively, matching consensus estimates. These figures are lower than the previous month's 3.5% and 3.8%.

The U.S. Federal Reserve kept policy unchanged for the seventh consecutive meeting, as expected. It made small changes to the policy statement, now saying there has been “modest further progress” on inflation, rather than “a lack of further progress.” They will require more data to confirm that inflation is decreasing towards their target of 2%. The CME FedWatch Tool now shows a 52.6% chance of a 25 basis point rate cut during the September FOMC meeting and a 38.5% chance of another 25 basis point rate cut in December.

The accompanying Summary of Economic Projections showed a shift in rate expectations. The median FOMC member now anticipates only one rate cut this year, down from three previously. The total number of cuts expected through the end of 2026 remained unchanged. That move came alongside an upward revision to the near-term inflation outlook and no change to expectations for growth or employment.

In his press conference, Powell continued to signal that the next move will be a rate cut, and that the timing of the first cut will depend on the incoming data. He indicated that, notwithstanding the better recent data, the FOMC still wants to see further improvements before it can be fully confident that inflation is returning sustainably to the 2% target. Powell also indicated that the Fed is watching downside risks to growth, and unexpected weakening in the labor market could support rate cuts.

Source: Bloomberg. FOMC dot plot as of June 12, 2024.

What does this mean for investors?

High interest rates impact REITs in a few ways, such as higher financing costs, thereby potentially affecting distributions, as well as lower property valuations. Publicly listed real estate securities such as real estate investment trusts (REITs) were among the hardest-hit asset classes during this Fed tightening cycle that began in March 2022. Given their elevated use of debt compared to broader equities, REITs declined precipitously (-21%) between mid-April 2022 and the end of October 2023, as measured by the FTSE Nareit All Equity REIT Index. But REITs have historically delivered strong relative returns in steady and declining rate environments.

THE iEdge S-Reit Leaders Index has declined 12.3 per cent for the year to May 29, while its total return is a negative 9.5 per cent.

The 22 constituents of the index have generated total returns ranging from a positive 1.3 per cent for Aims Apac REIT to a negative 25.2 per cent for CapitaLand China Trust.

Over the period, the 22 constituents booked just over S$790 million of combined net institutional outflow. Only Digital Core REIT, Frasers Centrepoint Trust and ESR-Logos REIT bucked that trend and booked net institutional inflow.

The iEdge S-Reit Leaders Index is the most liquid representation of the S-REITs market. It is an adjusted free-float market capitalisation weighted index that measures the performance of the largest and most tradable REITs in Singapore.
There has also been a directional correlation to the outlook for the US federal funds rate (FFR), in line with the global REIT market. Paralleling the importance of US interest rates and the US dollar on the global economy, US REITs have a significant impact on the global REIT market. US-listed REITs have a weight of 70 per cent in the FTSE EPRA Nareit Global Real Estate Index.
Investors should remember that Reits invest in income-generating assets and distribute rental income in the form of distributions to REIT unitholders.
Exclusive REITsavvy Newsletter
Gain financial insights on REITs in minutes

The newsletter that keeps you up-to-date on REITs in minutes.