Economy, the Fed, and Rates…
February 24, 2026
Economic Data & Labor Market
- Q4 GDP missed badly at 1.4% annualized (vs. 2.8% Bloomberg estimate, 4.4% prior). The record 43-day federal shutdown subtracted roughly 1 pp from growth (BEA estimate). Final sales to domestic purchasers — ‘core GDP’ — still expanded at 2.4%. Watch: The Q1 bounce-back in government outlays should mechanically lift the headline, but consumer deceleration deserves scrutiny.
- Core PCE re-accelerated to 3.0% YoY; monthly +0.4% was the hottest since February 2025. Headline PCE hit 2.9%. The PCE is running hotter than CPI (2.4%) because cooler housing inflation weighs more heavily in CPI than PCE. January PCE (due March 13) is tracking ~3.0–3.1% core — meaning the Fed will have zero encouraging prints in hand when Warsh potentially takes the chair.
- Supreme Court strikes down IEEPA tariffs 6–3; Trump moves to replace them within hours. The ruling immediately dropped the average effective U.S. tariff rate from 16.9% to 9.1% (Yale Budget Lab). Trump responded Friday with a 10% global tariff under Section 122 of the 1974 Trade Act, then raised it to 15% — the statutory ceiling — on Saturday. Section 122 is valid for only 150 days without congressional approval. The administration also signaled new trade investigations that could produce more permanent tariffs, but that process takes months. Over $133B in collected IEEPA duties are now subject to potential refund — the Court offered no guidance on repayment.
- Tariff pain is K-shaped. JPMorgan Chase Institute found that mid-sized firms’ tariff payments tripled over the past year, surging to 316% of pre-election levels. A NY Fed study showed ~90% of tariff costs fell on U.S. businesses and consumers. Large corporates can eat costs and shift supply chains; the middle market cannot.
Federal Reserve Policy & the Warsh Nomination
- January minutes: several officials want rate hikes back on the table. Participants endorsed describing policy risks as two-sided — explicitly flagging that increases could be as likely as cuts if inflation stays elevated. The 3.50%–3.75% rate is increasingly viewed as near neutral. Markets still price ~two cuts by year-end, but the Fed’s revealed preference is to do less.
- Warsh adds four dimensions of uncertainty. Bloomberg Economics flags: (1) balance-sheet shrinkage goals but contradictory signals on rate impact; (2) disdain for data dependence with no articulated alternative; (3) a vague “Treasury-Fed accord” that could expand or constrain independence; (4) possible elimination of the dot plot and fewer public speeches, which would widen risk premiums. Bloomberg’s analysis of Warsh’s public statements shows a striking shift from hawkish (2009–2011) to substantially more dovish than the current committee.
- Warsh’s first cut may not arrive before the midterms. With core PCE at 3%, seasonal Q1 price hikes, and a housing-data quirk likely to push the April reading higher, the earliest plausible easing window is September/October — right before the November elections. That collision between the president’s demands and the committee’s data requirements will be the defining dynamic of the new Fed leadership.
- The AI-productivity case for rate cuts faces deep internal skepticism. Warsh calls AI “structurally disinflationary,” but Governor Barr countered directly this week: higher productivity growth boosts investment demand and raises the neutral rate, not lower it. Vice Chair Jefferson, Kashkari, and Daly echoed the point. The 1990s analogy has a fatal flaw: Greenspan never cut rates because of productivity — he resisted calls to hike.
Treasury Yields & Bond Markets
- Bear-flattening week; front end led the move. 2-year 3.48% (+7 bps w/w), 10-year 4.08% (+3 bps), 30-year 4.72% (+3 bps). The 10-year snapped a two-week decline but remains 21 bps below its 2026 high (4.29%, January 20) and ~52 bps below its 52-week high (4.60%, May 21).
- Term premium — not dovish re-pricing — drove the February rally…and that’s fragile. Bloomberg Economics’ decomposition shows only ~one-third of the recent 10-year decline reflected lower rate expectations; the rest was compressed term premium driven by equity jitters and risk-sentiment rotation into duration. If equity volatility reverses, long-end yields can snap back without any change in the funds-rate path.
- Fiscal dominance: Tariff revenue hole meets unsustainable deficits. The ruling eliminates ~$1.4T in projected tariff revenue (2026–2035, Tax Foundation). CBO projects federal debt rising from 100% to 120% of GDP by 2036.
Dollar, Commodities, & Market Dynamics
- Dollar slips further, but “sell America” is overdone — for now. The Bloomberg Dollar Spot Index fell 0.2% Friday; euro at $1.18. Yet Treasury data show overseas investors bought a net $1.55T of long-term U.S. assets in 2025, up from $1.18T in 2024. The deeper vulnerability is that the rest of the world is now heavily invested in U.S. assets — meaning a sustained decline in U.S. stock prices wouldn’t just hurt Americans; it would ripple through foreign balance sheets globally.
- Gold holds above $5,100; fiscal anxiety underpins. Spot gold near $5,100–$5,130 on February 21, stabilizing after January’s all-time high near $5,595. Up ~75% YoY, the bid is increasingly structural — central-bank purchasing, deficit hedging, and geopolitical risk — rather than purely speculative.
CRE Finance Market Implications
- AI capex is colliding with housing supply through the land-and-power channel. In Northern Virginia, Amazon paid $700M for land a homebuilder acquired for ~$50M. Data-center development in Loudoun/Prince William Counties from 2022–2024 was 50% greater than the prior nine years combined. Similar dynamics near Chicago (a 55-home subdivision razed for data centers), Atlanta, and Dallas (land from $20–40K/acre to $350K+). The region faces a 75,000-home shortage.
- Office CMBS delinquency hit a record 12.34% in January — highest since Trepp began tracking in 2000. Close to $25B in CMBS loans sit past maturity without resolution; over half of ~$100B maturing this year are unlikely to repay (Morningstar DBRS). Lenders have concluded the demand shock is structural (hybrid work), not cyclical. Regional banks that were aggressive CRE lenders are entering peak distress.
- The K-shaped office market: trophy expands, commodity drowns. BXP’s 343 Madison (930K SF) is nearly half-leased three years before completion. SL Green’s CFO wishes 346 Madison were ready today. The Fed’s SLOOS shows rising CRE construction loan demand for the first time in four years. But meaningful new trophy supply is 4–5 years out, setting up a shortage by 2028–2030. Below the top tier, zombie buildings drag on downtowns from Portland to Dallas.
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.