Economy, The Fed and Rates
July 1, 2025
The Economy, the Fed, and Rates…
Economic Data & Inflation
- May inflation slightly hotter: Core PCE rose 0.2% m/m (vs 0.1% expected), with the annual rate at 2.7%. Overall PCE rose to 2.3% y/y, up from a revised 2.2%. Consumer prices overall rose 0.1%, lifting the annual rate to 2.3%.
- Consumer spending weakened: Personal spending fell 0.3% in real terms for May, down from April’s 0.1% increase. Personal income fell 0.4%, the most since 2021, reflecting a reversal of April’s Social Security payment spike.
- Q1 GDP revised lower: GDP contracted at a -0.5% annual rate vs a second estimate of -0.2%. Personal consumption rose just 0.5% vs. a second estimate of 1.2%, marking the weakest pace in almost two years.
- Labor market cooling gradually: Initial jobless claims fell to 236,000, but continuing claims rose to 1.97 million for the week ended June 14 - the highest since November 2021. This suggests employers are slowing hiring rather than laying off workers.
- Consumer sentiment rebounds: The University of Michigan Consumer Sentiment Index jumped to 60.7 from 52.2, an 8.5-point increase and the largest since the start of 2024. One-year inflation expectations improved to 5% from 6.6% in May.
Federal Reserve Outlook
- Market anticipates a more dovish post-Powell Fed: Traders are pricing in five quarter-point rate cuts by year-end 2026, betting that a Trump administration appoints a more accommodative Fed chair after Powell’s term ends in May 2026.
- Diverging Fed voices: Fed Governors Waller and Bowman favor a July rate cut, downplaying tariff-driven inflation, while Chair Powell advocates waiting until fall for more clarity on inflation trajectories.
Market Dynamics & Treasury Yields
- Stocks defying skeptics: The S&P 500 hit a fresh record high, completing a 27% rally from April lows. The recovery reflects confidence that Trump will moderate his most aggressive tariff threats and that the economy can weather current uncertainties.
- Bond market sending warning signals: The 10-year Treasury yield remains elevated at around 4.28%, up about 60-70 bps above last September’s lows. This persistence despite rate cut expectations reflects growing concerns about fiscal sustainability and inflation risks.
- Dollar weakness raises alarm: The dollar fell to a three-year low, breaking its traditional positive correlation with Treasury yields. Citadel’s Michael de Pass warned that this divergence reflects questions about U.S. “institutional integrity” and policy predictability.
- Corporate bonds resilient: The gap between corporate bond yields and Treasuries is near the tightest since 2005, reflecting investor confidence in the Fed achieving a "soft landing." Foreign investors bought about $45 billion of US corporate notes in April, the most in six months, according to Citigroup's analysis of Treasury data.
Implications For the CRE Finance Market
- High yields pressure cap rates: The elevated 10-year Treasury yield is keeping office capitalization rates high, which must fall for asset values to recover. The current spread to Treasuries is below the historical average, suggesting a sustained drop in yields is needed to spur an office market recovery.
- Financing conditions are tight: New debt is available for top-tier properties, but with implied coupons approaching 7%, many deals are uneconomical.
- Path of rates matters for financing: A higher likelihood of five Fed cuts (by year-end 2026) would ease SOFR-linked debt costs, improving floating-rate loan performance and encouraging transaction activity.
- Credit market strength offers a tailwind: Strong demand for investment-grade U.S. debt indicates a persistent global appetite for yield, likely to support CMBS and private CRE debt pricing.
- Economic caution warranted: Slower consumption and GDP growth argue for conservative underwriting in sectors like retail and hospitality, particularly for assets and loans facing 2025–2026 refinancing cliffs.
You can download CREFC’s one-page MarketMetrics, which includes statistics covering the economy and the CRE debt capital markets,
here.
Contact
Raj Aidasani (
raidasani@crefc.org) with any questions.