The Decision
The Federal Reserve raised its federal funds target range by 25 basis points (bps) to 3.75%–4.00% at the conclusion of its September 15–16 meeting, its first hike since 2023 after holding rates steady to this point in 2026. The move builds on sentiment from July, when three FOMC members dissented in favor of raising rates, and follows Chair Kevin Warsh's hawkish tone at Jackson Hole in August, where he cautioned that recent, better-than-expected inflation readings had not yet shown durable improvement in underlying price pressures.
Futures markets had priced in greater than 90% odds of this outcome heading into the decision, so today's move largely validates where investors were already positioned. The FOMC vote for a September hike was unanimous, with the updated Summary of Economic Projections (SEP) showing that 16 of the 18 FOMC meeting participants see one additional hike before the end of the year.
The Fed's Message: Dovish or Hawkish Hike?
The 25 basis points was a near certainty. The more important question heading into this meeting, for markets and for CRE, was what kind of hike this turns out to be: is this a “dovish” hike or a “hawkish” one? In other words, is this a one-time recalibration or the beginning of a coordinated rate-hiking cycle? We would argue the Fed split the difference. A “one-and-done” move is not the most likely path forward, nor is a prescriptive path of sequentially higher interest rates.
The first clue lies in the SEP, which indicates that while 16 of the 18 meeting participants see at least one additional hike in 2026, only four of those expect two hikes will be appropriate before year-end. Additionally, most FOMC members anticipate that rates will be just 25-50 bps higher at the end of 2027 than they are today. It should be noted that only 12 FOMC members receive a vote in the rate decision, and we do not know who voted for what, so the balance of influence may not be quite as hawkish as it looks on paper. Crucially, Fed Chair Kevin Warsh unsurprisingly did not submit a projection and he could very well be averse to a prescribed hiking cycle at this time, especially given his previously communicated aversion to verbose forward guidance.
More information was needed, but Warsh was reluctant to deliver a decisive view one way or the other at his brief post-meeting press conference. Warsh did reaffirm his preference for assessing inflation and the economy in a holistic and methodical way rather than leaning “breathlessly” on one or two data points, suggesting that further rate decisions are not on a predetermined path. The Fed is likely to be in “wait-and-see” mode, and it is conceivable that data trends over the next several months will suggest no further hikes will be necessary. The opposite is also possible, but that depends on a host of factors, particularly the Middle East conflict and its impact on energy prices, which the Fed has little control over.
An underappreciated aspect of the Fed discourse, which has fixated on inflation and interest rates, is Warsh’s assessment that underlying growth in the economy has broadly strengthened over the last several months. This view is seemingly shared by his FOMC colleagues, as median SEP projections for both GDP and unemployment over 2026-2027 moved in positive directions since June. This is of critical importance for CRE investors and occupiers: a strong economy drives healthy leasing activity and income returns across property sectors.
Markets React
A hike that was this heavily pre-priced limited disruption to financial markets, although the initial reaction was negative. Equities fell 0.5% on the S&P 500 and 1.2% on the Dow on September 16 following the decision. Bond yields also moved higher, and the yield curve flattened. The 2-year Treasury was up 7 bps, while the 10-year moved a couple of ticks higher to 5.01% after flirting with these levels over the previous couple days. Treasury inflation-protected securities also moved more substantially, indicating that markets remain uncertain about the inflation outlook and the path of monetary policy.
That initial reaction has already begun to reverse. Equity futures are pointing to a solid rebound, while Treasury yields and oil prices have moved lower. That suggests markets are continuing to digest the Fed’s message rather than viewing yesterday’s reaction as a fundamental deterioration in the outlook.
Oil prices, although squarely outside the Fed’s control, bear close watching, as they have been a key reason bond yields and inflation have moved higher. Both Brent and WTI oil futures pushed decisively past the $100/bbl mark in recent days amid the still-unresolved Iran-related tensions in the Middle East, but have since edged lower. More decisive relief would give Warsh and the Fed greater latitude to avoid further tightening, but odds of this are hard to pin down, since they rely on geopolitics rather than pure economics.
It's also worth noting this isn't purely a U.S. story. Five of the G10 central banks have already raised policy rates this year, reflecting a broader shift toward tighter monetary policy as energy-driven inflation pressures have intensified. The European Central Bank raised rates again this month, taking the deposit rate to 2.5%; Australia and New Zealand have also been tightening, while Japan is expected to raise rates again this week. A U.S. hike puts the Fed in step with a broader global tightening trend, which may help limit large swings in FX markets.
Our Base Case
After this hike, we expect the Federal Reserve to raise rates once more in December, allowing time in the interim to assess the financial-market and economic impacts as tighter policy filters through. From there, the outlook largely comes back to oil and how much energy prices bleed into core inflation.
Our base case assumes the Iran conflict begins to stabilize after the midterm elections, allowing oil prices to trend lower and gradually take some pressure off inflation. Even with inflation remaining above target, we expect price pressures to gradually recede as energy markets stabilize. Importantly, longer-term inflation expectations remain mostly well anchored, though they bear close watching for clues on the rate path for 2027 and beyond. This will be a critically important metric to watch: a sustained rise in inflation expectations would increase the risk that the Fed needs to tighten more aggressively.
Against that backdrop, we expect the federal funds rate to remain at that 4.00%-4.25% range through 2027, while the 10-year Treasury yield gradually moves back toward the 4.5-4.7% range, consistent with our estimate of its longer-run equilibrium. Meanwhile, GDP growth is still expected to settle near a 2% growth rate this year and next, generating nearly 1.5 million jobs over the two years. This framework is conducive to an ongoing recovery in CRE.
What It Means for CRE Investors
- Expect commercial mortgage rates to push above the ~6.5% level cited in recent lender surveys; underwrite assuming no near-term relief from falling base rates in 2026, but with borrowing costs gradually declining in 2027 as longer-term rates normalize.
- Existing trophy assets become even more strategically attractive. Higher financing and development costs will constrain new construction, increasing the scarcity value of newer, well-located, high-quality assets. Highly leveraged assets and properties facing near-term refinancing are most exposed, particularly if this proves to be the start of a hiking cycle rather than a single calibration move.
- Don't assume rate direction and NOI direction move in lockstep: a hike driven partly by economic resilience would still support leasing fundamentals and provide some offset.
- Importantly, this hike lands on a CRE market that is already in noticeably better fundamental health than a year ago: leasing activity has picked up, rent growth has held firmer, and NOI growth has broadened across property types. That underlying strength is a real cushion against higher financing costs, not just a hopeful offset.
What It Means for CRE Occupiers
- Higher rates will further constrain new construction. With development already limited, expect even less new supply, particularly of high-quality space, to come to market over the next several years. For occupiers seeking high-quality space, waiting may not pay.
- With limited new construction and leasing demand improving, well-located, high-quality space should become increasingly competitive. Where the right space is available, consider acting sooner and securing it for longer.
- Higher rates tilt lease-versus-own decisions toward leasing. Elevated financing and development costs raise the relative cost of ownership and ground-up construction, strengthening the case for leasing and flexibility in the near term.
- Higher refinancing costs may create negotiating opportunities. Some landlords facing near-term debt maturities may be more motivated to secure durable tenants, creating openings for occupiers to negotiate favorable terms.
Bottom Line
This hike had been substantially pre-priced, so the bigger news was not the 25 basis points itself, but the probability that rates will head modestly higher in the months ahead. The updated dot plot and Warsh’s press-conference tone reinforced the message that the Fed remains focused on inflation and is prepared to tighten further if necessary. Markets initially reacted negatively to that more hawkish message, although the early rebound in the futures market today (September 17) suggests investors are taking the move largely in stride.
For CRE, that raises the risk that rates remain higher for longer, and potentially move higher still, but it does not fundamentally change our base case. We expect the Fed to move methodically going forward and not overreact to headlines on inflation, but rather take their time assessing how this filters through financial markets and the economy. If the Iran conflict stabilizes and oil prices begin to retreat, inflation pressures should ease and reduce the need for additional tightening.
The key question for CRE is whether healthy property fundamentals can continue to offset higher financing costs. Encouragingly, this rate hike lands on a market with improving leasing activity, constrained new supply and broader NOI growth. CRE is therefore in a better position to absorb higher rates than it was a year or two ago.
The downside risks are still palpable. If oil and inflation remain elevated, particularly if longer-term inflation expectations begin to rise, we could move toward our more challenging "Another Leg Higher" scenario, in which the entire yield curve shifts significantly higher. That would argue for greater caution around highly leveraged assets, near-term refinancing exposure, and acquisitions dependent on cap-rate compression.
This report has been prepared solely for information purposes. It does not constitute investment advice and Cushman & Wakefield accepts no liability for actions taken on the basis of its content. Sources: Federal Reserve, CME FedWatch, Kalshi, Polymarket, Bloomberg, CNBC, Trepp/Commercial Mortgage Alert, Cushman & Wakefield Research.
