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Economy, the Fed, and Rates…

Economic Data

• Inflation pressures are mutating, not vanishing. April CPI slowed to 2.3% y/y, with PPI at 2.4%, but both showed “modest tariff pass-through” on goods largely offset by outright deflation in services. Bloomberg Economics calculates that the same goods/services split should cap core-PCE around 3% by year-end, below the 3.3% consensus, even after accounting for the tariff shock.
• Consumers are blinking. April retail sales were notably weak, rising just 0.1% after a 1.7% surge in March. The slowdown is attributed to consumers pulling back in categories exposed to China-related tariffs, indicating sensitivity to price increases. Spending on food services, however, remained solid, limiting downside risk to overall consumption. 
• Input-cost squeeze at the factory gate. Producer prices fell -0.5 % m/m, the biggest drop in five years, as margins shrank; firms are absorbing tariff costs rather than passing them through – for now.

Federal Reserve Policy

• Fed Chair Jerome Powell pivots back to an inflation-first doctrine. In back-to-back speeches, Powell warned of “more frequent and potentially persistent supply shocks.” He said the Fed will rewrite the 2020 framework, reconsidering the “shortfalls in employment” language and shelving “average inflation targeting.” Translation: the bar for pre-emptive rate cuts just got higher.
• Rate cut timeline delayed. Market expectations now target September for the resumption of rate cuts, significantly later than early-year forecasts. The Atlanta Fed’s Bostic maintains an outlook for just one rate reduction in 2025, citing persistent uncertainty unlikely to resolve quickly.

Treasury Yields & Credit

• Moody’s strips U.S. of triple-A rating. Moody’s lowered the U.S. credit score to Aa1 from Aaa on Friday, joining Fitch and S&P in grading the world’s biggest economy below the top, triple-A position.
• Long bonds cross 5% - briefly. The Moody’s downgrade, while largely symbolic given the dollar’s reserve status and the depth of U.S. financial markets, has contributed to upward pressure on Treasury yields. The 10-year yield climbed to around 4.5%, and the 30-year briefly crossed 5%-levels that historically begin to weigh on equities and risk appetite. The 30-year yield is up over 40 bps since early April while the 10-year yield is up over 30 bps.
• Foreign investors reducing Treasury exposure. Central banks and sovereign wealth funds now hold just 36% of U.S. debt, near the bottom of the historical range since 2012. Additional selling due to the Moody’s downgrade looks unlikely; many investors long ago rewrote mandates to allow sub-AAA Treasuries, and PGIM argues the immediate market impact will be “minimal.”

Impact on CRE Finance

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