While Jerome Powell lives on borrowed time as Federal Reserve chair before President Donald Trump picks a successor in early 2026, the final year of his term is headed for uncharted economic waters that could have a lasting impact on the commercial real estate market.
Trump attacked Powell in mid-April over not cutting interest rates early this year, saying he had the power to remove the Fed chairman, before later deciding to back off on trying to do so before Powell’s term expires in May 2026. Powell was appointed as Fed chair by Trump in 2018 and President Biden re-appointed him to another four-year term in 2022.
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Powell has stayed above the fray this year as he tries to navigate the central bank through a challenging economy now hit with yet more unknowns following Trump’s April 2 “Liberation Day” tariff announcement. At his May 7 press conference after the Fed opted to pause interest rates for a third straight meeting to open 2025, Powell said if increased tariffs are sustained they would likely spur a rise in both inflation and unemployment while stressing it was too early to determine if adjustments to monetary policy were necessary.
While Powell’s decision to aggressively raise interest rates in early 2022 to combat inflation caused distress for a number of CRE properties, he has limited tools remaining to attack projections by many economists of rising prices and slower growth.
“They can employ liquidity backstops and stronger forward guidance to stabilize markets and manage expectations, but these will not offset the core tension between inflation and slowing growth,” said Sam Chandan, director of New York University’s Chen Institute for Global Real Estate Finance. “The Fed’s decisions will be adjudicated more harshly if growth slows — even if the root cause lies in trade policy rather than monetary policy.”
Scott Waynebern, co-managing member of lender MF1, said that while peaks of volatility in April might have delayed some issuance of bonds, the market has since recovered and is seeing heavy CRE collateralized loan obligation issuance.
Waynebern said the multifamily sector, which MF1 focuses on, is more insulated from international trade issues than other asset classes due to strong supply and demand dynamics in many markets. He noted that tariffs could reduce the forward supply of new rental housing assets, but stressed that “persistently high rates” have been a bigger catalyst of spurring a “significant drop” in new units.
“The imbalance of demand over supply at the renter/property level is set to accelerate as long as there are not significant job losses as a result of federal policy changes,” Waynebern said. “Loan spreads late in the first quarter had gotten overheated with some new entrants in the market chasing business, but the volatility has moved spreads out by 25 to 50 basis points to what we consider healthier levels given the pricing of other debt asset classes.”
Powell enacted 11 interest rate hikes out of 12 Fed meetings between March 2022 to July 2023, and then paused for the next 14 months. The Fed then shifted in late 2024 with three cuts totalling 100 basis points in its final three meetings of last year prior to deciding to hold borrowing conditions steady in early 2025 despite calls by Trump for more reductions. The late 2024 shift came amid cooling inflation figures.
After Trump unleashed wide-scale global tariffs on April 2, he agreed to a 90-day pause a week later in a move that did not apply to China (which he had hit with a crushing 145 percent tariff). The U.S. and Chinese governments then agreed to suspend most higher tariffs between the countries on May 12 for 90 days. The move boosted markets that day.
Prior to the agreement reached with China and during weekend discussions in Switzerland with trade officials, Apollo Global Management chief economist Torsten Slok projected a U.S. recession by the summer due to supply chain shocks resulting from higher tariffs Trump was imposing on China.
Despite a momentary reprieve from China tariff headwinds, the issue is still creating “outsized volatility,” according to Chandan, due to the continued uncertainty about how policies could shift favorably or unfavorably multiple times before full clarity is realized. (Indeed, tallies note that Trump has shifted his tariffs policy more than 50 times now in the last few months.)
Chandan said the Fed faces a tough task now trying to make key policy votes amid heightened political scrutiny while it continues its longstanding independent decision-making process anchored by economics.
“The Fed must sustain public confidence in the integrity and rigor of its decision-making — without appearing to campaign for that trust,” Chandan said. “Its legitimacy rests not only on outcomes, but on a visible commitment to nonpartisan, evidence-based decision-making.”
Tariff-related challenges like inflation and elevated interest rates are expected to pressure CRE assets backed by commercial mortgage backed securities (CMBS) loans. Market uncertainty has already led to a pause in large-scale capital investments, according to a May 14 Fitch Ratings report.
Industrial properties, particularly in West Coast port markets, will be most affected by reduced trade activity due to heavy exposure to goods from China coupled with oversupply in markets like Southern California’s Inland Empire, according to Fitch. The Fitch analysis noted that lower import volumes will especially hamper “smaller, less well-capitalized tenants,” resulting in less demand for industrial space.
In the leadup to the Fed’s May 7 meeting, shipping data showed imports from China to the Port of Los Angeles plunged, leading to concerns of potential supply shortfalls. Powell said the Fed monitors shipping data, but he stressed in his press conference after the meeting that the central bank does not have “the kind of tools that are good at dealing with supply chain problems” and that that is “a job for the administration” and “the private sector” to contend with.
Martin Wurm, director of economic research at Moody’s Analytics, said other than interest rate cuts, the Fed has few tools to counteract economic stagnation, which has historically created struggles for the central bank. The most recent example was with the “runaway inflation” in the 1970s and a “deep recession” in the early 1980s. Wurm said conventional wisdom would result in the Fed prioritizing price stability by keeping interest rates higher due to “unanchored inflation” that can otherwise result in severe recessions. He stressed, though, that rising unemployment can also produce “tail risks” toward an economic downturn.
The Moody’s Analytics May outlook, which came out before the U.S.-China tariff pause, projected three quarter-point rate cuts in 2025 to reach the 3 percent level by 2026. Wurm said this reflected expectations that tariffs will create inflationary pressures this year, but also reflected slower hiring trends that are influencing the Fed to act slower. He said a stabilization of tariff issues would mean later Fed action on cuts because that stabilization would in turn stabilize the economy.
“The temporary trade deal with China last weekend demonstrated the administration can still find an off-ramp for at least some of its tariff policies, and some of their effects may be short-lived,” Wurm said. “Because such deals appear politically likely and reduce recession risks, the Fed will wait a little longer before jumping to cuts.”
Andrew Coen can be reached at acoen@commercialobserver.com.