The real estate sector has been hamstrung this year as the Federal Reserve has yet to deliver widely hoped for interest rate reductions. Those are the breaks for rate-sensitive groups such as real estate.
However, the May reading of the Consumer Price Index (CPI) delivered last week stoked hopes that the Fed has the wiggle room to cut rates this year – perhaps twice – and that could support gains for real estate equities and exchange traded funds such as the ALPS Active REIT ETF (REIT ).
However, good news may emerge for REIT’s near-term rate cut fortunes. Core inflation in the May CPI report ticked higher by just 0.16% month-over-month. Experts believe that implies the Personal Consumption Expenditures (PCE) Index report due out later this month will show further evidence of cooling inflation. That’s relevant for advisors and investors considering assets such as REIT. PCE data carry more weight than the CPI updates.
Fed Might Be Too Pessimistic
Regarding real estate ETFS such as REIT, there’s more to the story than interest rates. That said, the sector’s near-term outlook is very much beholden to Fed policy. The issue there is that the central bank is arguably too gloomy in its inflation views.
“So, in any case, the Fed is projecting that core PCE inflation in the fourth quarter of this year will stand at 2.8% year over year. I think that’s a little too pessimistic,” opined Morningstar analyst Preston Caldwell. “I think based on how inflation will track over the rest of this year, that will be at 2.4%, not 2.8% year over year, core PCE inflation at the end of this year. That’s much more optimistic on inflation. And so, I think if inflation comes in below the Fed’s more pessimistic estimate, then they will end up cutting two or three times rather than the one cut that they’re baking in.”
Three interest rates over the next six months might be a stretch, but two is plausible and pertinent. After all, two would surpass the expected single rate. That surprise could provide the fuel needed to power a rally by real estate ETFs including REIT.
The consistently sturdy U.S. economy could be the avenue through which the Fed indulges more rate cuts than expected. This would potentially provide support to a REIT bull thesis.
“I think the fact that the economy has been so strong over the past few years even as interest rates have been high in reality has led some people to think that the neutral rate might be higher than the 2.5% that they previously expected. So, we’re starting to see that gradually be reflected in Fed members’ expectations. But still, though, they haven’t changed their year-end 2026 federal-funds rate expectation at all over this period,” concluded Caldwell.
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