The Federal Open Market Committee’s (FOMC) recent meeting has sparked renewed speculation about the Federal Reserve’s policy trajectory, particularly its response to inflation risks and labor market weakness. While initial headlines suggested a steeper yield curve and lower rates, the broader implication is a potential return to rate cuts should economic pressures intensify.
Fed’s Next Move
Bryan Jordan, chief strategist at Cycle Framework Insights, Inc., told Connect, “Assuming the risks flagged in the statement come to fruition, it is likely that the FOMC’s next move will be to resume the rate cut cycle. The Fed has historically prioritized the labor market side of its mandate during periods in which both unemployment and inflation have risen. Note, for example, the aggressive rate cuts in 1980, 1981, and 2008.” Jordan added, also recalling the 2019 rate cuts triggered partly by trade policy uncertainty impacting business investment.
The U.S. 10-year yield could retreat to 4% if macroeconomic pressures build. While the current economy remains firm enough to keep market rates stable in the near term, the Fed is expected to guide interest rates toward a 3% to 3.25% range, which could nudge the 10-year yield below 4%—a classic market response to recessionary concerns.
Safety or Pain Trade?
The U.S. Treasury market remains the global benchmark for risk-free yields, but post-“Liberation Day” volatility briefly disrupted its traditional safe-haven appeal. Investors typically flock to Treasuries during uncertainty, yet recent events momentarily turned safety trades into pain trades. As markets stabilize, the next flight to government securities may not be as automatic as in previous downturns.
Adding complexity is an undercurrent of U.S. dollar vulnerability. Currencies like the Taiwanese dollar, Swiss franc, euro, and Japanese yen have appreciated against the dollar—many by over 8% year-to-date—while the Hong Kong dollar hovers at its floor due to foreign exchange interventions. This de-dollarization trend poses a risk to U.S. Treasuries, potentially amplifying yield volatility.
Recession Risks and Yield Pressure
Traditionally, recessionary signals push yields lower as slowing growth eases inflationary pressures and weighs on risk assets like corporate earnings. While risk assets have recently shown resilience, defensive undertones linger, and the expiration of a 90-day tariff pause could heighten recession risks. Should these materialize, the U.S. 10-year yield might test levels below 4%, though the current 50-basis-point swap spread (10-year Treasury yield over 10-year SOFR) suggests that a more substantial rate cut would be necessary for yields to decline meaningfully.
Commercial Real Estate: A Mixed Outlook
Uncertainty in the rates market has suppressed commercial real estate (CRE) deal flow. Dean Dulchinos, head of real estate credit at ORIX USA, told Connect, “We at ORIX USA anticipate continued higher rates for longer will have a dampening effect on new deal flow. We started to see a pickup in Q4-24 and Q1-25 when expectations for rate cuts in 2025 were relatively widely held by the market, but as the events of 2025 raised concerns about higher rates for longer, we saw transaction volume fall off a bit. It’s still steady, but the pace seems a little slower than the last two quarters.”
Despite this, opportunities remain. Dulchinos highlighted the multifamily sector’s resilience: “We believe the broader CRE environment is less directly impacted by tariffs, and multifamily, in particular, is well-insulated from tariff impact because it is not directly involved in the manufacture or movement of goods and equipment.”
Looking Ahead
The coming months will be pivotal. With Treasury yields flirting with lower levels, and de-dollarization pressures simmering, markets face a delicate balancing act. For CRE investors, selective opportunities like multifamily may offer stability amid the uncertainty, while broader economic trends will dictate the Fed’s next steps.
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