Fed Rate Hike: What It Did to Real Estate Debt Pricing

Randy Efron walks through the September Fed rate hike and what it means for hotel and multifamily debt.

The Fed Rate Hike, and What Happened Next

The Federal Open Market Committee raised the federal funds target range by 25 basis points on September 16, to 3.75% to 4.00%. The vote was unanimous, 12 to 0, and it was the first Fed rate hike since July 2023.

Most of the coverage stopped there. For anyone who owns or finances hotels and multifamily, the more useful story is what happened to everything else, including commercial real estate interest rates. Over the last month, the 5 Year rose about 22 basis points, the 10 Year about 25 and the 30 Year about 21. Comparatively, the federal funds rate moved 25 basis points.

Over twelve months the gap is wider. The Fed's range is a net 25 basis points lower than it was a year ago, after two more cuts last fall and then this hike. Over that same stretch the 10 Year went from 4.05% to 5.21%, an increase of 116 basis points. If you have been waiting for the Fed to bring your refinance rate down, that is the comparison I would look at first.

Before getting to your loans, it helps to understand why the Fed moved at all.

Where 3.75% to 4.00% Sits in History

Against the long run average

The midpoint is 3.88%, and by the full historical record that is a middle of the road number. It is about 1.5 points below the 5.25% to 5.50% peak the Fed reached in July 2023. That cycle began in March 2022 from near zero and added 525 basis points in 16 months. Today's rate is a little below the long run average, which is roughly 4.60% going back to the mid 1950s, and nowhere near the early 1980s, when the target range went to 19.00% to 20.00% to break the inflation of the 1970s.

Against the era your loans were written in

The comparison I care about more is with the era in which most of today's loans were underwritten. From late 2008 to early 2022, the top of the target range never went above 2.50%, and for most of that stretch it sat at 0.25% or lower. A 4.00% fed funds rate looked punitive in 2019. By the standards of history it is ordinary, but plenty of sponsors who bought or built in that window have never underwritten or refinanced in a world like this one.

Why the Fed Raised Now, and How a Hike Is Supposed to Work

Why the Fed acted in September

The Fed held rates at its first five meetings of 2026, so this wasn't a reflex. Chair Kevin Warsh said three things changed since July: the economy strengthened, inflation did not slow, and geopolitical tensions intensified. The most visible piece of that last point is the energy shock from the war with Iran. Inflation has now been above the Fed's 2.00% target for more than five years, and Warsh said plainly that it has been too high for too long.

What the Fed is trying to prevent

The minutes add a more specific argument. Some participants said a higher rate would help keep price increases tied to energy and to AI related demand from spreading into the rest of the economy. A rate hike does not lower the price of crude. What the Fed wants to prevent is that first jump in prices spreading into everything else.

In plain terms, when oil jumps, the first round of inflation is obvious. Gas, diesel, jet fuel and anything with a freight bill costs more. That part comes from supply, and the Fed cannot fix it. The AI buildout works the same way on a smaller scale. Companies spending heavily on data centers, power and chips bid up the price of electricity, equipment and construction labor.

The risk is the second round. A business sees its costs rise and raises prices a little more than it strictly needs to, because it expects everyone else to do the same. Workers see prices climbing and ask for bigger raises. Those raises become the next round of business costs, and prices go up again. Once people expect prices to keep rising, rents, room rates, wages and contracts all get written with that assumption built in, and the expectation feeds itself. That is what I mean by an inflation habit.

The Fed's argument is that it is far easier to break the habit early, with a modest increase, than after everyone has changed their behavior. In the early 1980s it took a target range of 19.00% to 20.00% to undo it.

How a hike reaches your borrowing costs

Here is how it works. The fed funds rate is what banks charge each other for overnight loans. Banks need those loans because cash moves in and out all day as customers deposit, withdraw and wire money, and at the close some banks are short while others have extra. The short ones borrow from the ones with extra. Banks used to be required to keep a set share of their deposits in reserve at the Fed, which made this borrowing routine. That requirement was cut to zero in March 2020, but banks still keep large balances at the Fed to settle payments and manage their liquidity, so the overnight market still exists.

Banks negotiate the rate with each other, but the Fed sets the boundaries. It pays banks interest on the cash they leave with it, and no bank will lend to another for less than it can earn at the Fed. It also lends to banks directly at a higher rate, and no bank will pay another bank more than that. When the Fed raises its target, it raises the rate it pays and the rate it charges by the same amount. That lifts the floor and the ceiling together, so the rate banks charge each other moves up too.

That means banks pay more for short term money, and they pass that along in what they charge businesses and households on credit lines, floating rate loans and credit cards. That slows borrowing, investment and hiring at the margin, softens demand and takes pressure off prices.

Why slower spending lowers prices

The link between those two things is supply and demand. Prices rise when more money is chasing the same amount of goods, space and labor, and higher rates reduce how much money is chasing. When borrowing costs more, fewer people finance a car, a home or a renovation. Businesses delay expansion because the project now has to clear a higher hurdle. Developers, who live on borrowed money, pull back on new projects. Each of those is a purchase, a build or a hire that does not happen.

With fewer buyers, sellers lose some pricing power. A contractor with an empty calendar sharpens the bid, and an employer with fewer open roles feels less pressure to keep bidding up wages, and since wages are the largest cost for most businesses, slower hiring is one of the main ways cooler demand turns into cooler prices.

How a Fed rate hike shows up in commercial real estate

Real estate is one of the first places a rate hike shows up. Most buyers use debt, and when the loan costs more, the same property supports a smaller loan. A buyer who can borrow less has to put in more equity or offer a lower price. Bids come down, fewer deals get done, and sellers have to choose between cutting their price and waiting for rates to fall.

Construction slows too. Higher borrowing costs mean fewer projects pencil, so fewer get started, and that reduces demand for labor and materials.

None of this happens overnight. A rate change takes months to show up in prices and deal volume. That is why the Fed acts before inflation has fully worked through the system. It is also why the Fed can go too far, because it can't see the full effect of one hike before it decides on the next.

What the Fed is signaling next

The Fed is also signaling it may not be finished. In the September projections, 16 of 18 participants expected at least one more increase before year end, and the median projection has the rate finishing 2026 around 4.10%. The next decision is October 28. The September inflation report, released October 14, showed core prices up 0.30% against the 0.20% economists expected, which raised the odds of another hike.

How Much Weight to Put on CME FedWatch

What FedWatch measures

The CME, short for Chicago Mercantile Exchange, is one of the largest futures exchanges in the world, and FedWatch is its tool. Fed funds futures are contracts traded there that let investors bet on where the federal funds rate will be in a future month. Banks, funds and other large borrowers also use them to protect themselves against rate changes. Each contract covers one month, and its price reflects the average rate traders expect over that month. If traders think the Fed will raise rates at its next meeting, the price moves to reflect it.

FedWatch reads those prices and converts them into probabilities for each possible outcome at each upcoming meeting: a hike, a cut, or a hold, which means the Fed leaves rates where they are. Because real money is behind the prices, it is a useful read on what the market expects. But it is a market price, not a forecast from the Fed.

When it works

Close to a meeting it works well. On September 10, six days before the decision, FedWatch showed a quarter point hike at about 62.00% and a hold, meaning no change, at about 38.00%. The Fed hiked. Even there, a week out, there was a real chance of a different answer.

When it does not work

Further out it is much less reliable, and this year shows why. In early January, after three cuts in the fall of 2025, FedWatch showed the market expecting still more cuts during 2026. Two cuts was the single most likely outcome at about 32.00%, and no change for the entire year had only about an 8.00% chance. Instead, the Fed held for its first five meetings of 2026, made no cuts at all, and then raised rates. The war and the energy shock explain why, but nobody was pricing them in January, and that is the point. FedWatch can only reflect what the market knows today, so it can't tell you where rates will be after the next surprise. We saw the same thing in early 2024, when futures priced roughly six cuts starting in March. The Fed delivered three cuts totaling 100 basis points, beginning in September with a 50 basis point cut and followed by two 25 basis point cuts in November and December.

The swings can also be fast. One published tracker had October hike odds near 70.00% in late September and around 20.00% by October 5. After a hotter than expected inflation report on October 14, market pricing reported by Bloomberg jumped to about 46.00%. Odds that move that much in a few weeks are a snapshot of market sentiment on one day, not a forecast you can plan around.

How I use it

I use FedWatch for the next meeting and treat it as one input after that. If a deal only pencils when today's forecast turns out to be right, I'd want a second look at the deal. And since the fed funds rate is not what your fixed rate loan is priced off, even a perfect forecast would only answer part of the question.

What Actually Moves With the Fed Funds Rate, and What Does Not

This is the part that matters most for how you finance a deal. The indices we quote every day have very different relationships to the Fed's policy rate. Here is where they stood at the close on October 13, 2026.

Levels as of the close on October 13, 2026. Scroll sideways to see the full table on mobile.

Prime and Term SOFR

Prime and Term SOFR are the floating rate indices, and they are mechanical. If your loan floats on either one, a Fed move flows into your debt service at the next rate reset, which is often within a month.

The 5 Year Treasury

The 5 Year sits in the middle, and the 2 Year Treasury helps explain why. A Treasury yield is roughly the market's guess at what short term rates will average over the life of the bond, plus a little extra for tying money up. The midpoint of the Fed's range today is 3.88%, but the 2 Year Treasury yields 4.79%. If investors expected the Fed to stay put, they would accept about 3.88% for two years, because they could keep their money short and earn that instead. The extra yield, almost a full point, tells me the market expects the Fed to keep raising rates.

The 5 Year works the same way over a longer stretch. At 5.00%, it carries that expectation of more hikes plus the extra payment investors want for locking up money for five years. That is why the 5 Year moves when the market's view of the Fed changes, often before the Fed does anything.

The 10 and 30 Year Treasury

The long end is where the relationship breaks down. Over the last twelve months the Fed's range is down a net 25 basis points, while the 5 Year is up about 135, the 10 Year about 116 and the 30 Year about 93. The 10 Year now sits roughly 133 basis points above the middle of the fed funds range. In 2023 it was the other way around, with the 10 Year well below the funds rate.

The longer view makes the point even more clearly. Since August 2024, just before the first cut, the fed funds rate is down a net 1.50 points, while the 5, 10 and 30 Year are each up about 1.25.

What is inside the 10 Year rate

It also helps to look at what is inside the 10 Year rate. Think of it as two pieces added together. One is the inflation the market expects over the next ten years. The other is what investors earn on top of inflation for lending to the government. We can see both pieces in Treasury data. The 10 Year Treasury Inflation Protected Security, known as TIPS, pays a yield on top of inflation, so its yield is the second piece. Subtract it from the regular 10 Year yield and what is left is the inflation the market is pricing in, which is called the breakeven rate.

On October 13 the 10 Year was 5.21%. According to U.S. Treasury yield curve data, the 10 Year TIPS yielded 2.88% that day, which leaves about 2.33% for the inflation the market is pricing in. A year ago the 10 Year was 4.05% and the TIPS yield was 1.75%, which leaves about 2.30%.

We have seen this disconnect before. The Fed cut 100 basis points beginning in September 2024, and the 10 Year rose nearly a full point between that first cut and the end of the year. If your debt is fixed and priced off the 5 or 10 Year, the fed funds rate has only a loose connection to your rate.

What else is moving rates

One caution before drawing conclusions from this table. The fed funds rate is not the only thing moving these numbers, and I don't want to suggest it is. The war with Iran and the jump in energy prices are a big part of why the Fed raised rates, and they also affect Treasury yields directly. Higher energy costs push inflation up and add uncertainty, and investors ask for more to lend when the outlook is unclear. Add heavy AI related spending, trade tensions and the amount of debt the Treasury has to sell, and there are several forces acting on long term rates that have nothing to do with the Fed's decision. The long end has been under real pressure. In August, after the 30 Year hit its highest level since 2007, the Treasury said it would at least double its buybacks of long dated debt, a move meant to steady the market. Since then the 30 Year has climbed higher still, to levels not seen since 2002. Part of the rise is the term premium, which is the extra yield investors demand for holding a long bond instead of rolling short ones. On the New York Fed's model it was about 0.98% in early October, the highest since 2014.

So when the Fed hikes and long rates rise in the same month, that does not mean the hike pushed them up. Both may be reacting to the same news. I can't tell you how much of the move comes from each source, and I'd be skeptical of anyone who says they can. What the data does support is the practical point. Prime and Term SOFR follow the Fed. The 5, 10 and 30 Year take the Fed into account, but they don't necessarily move in the same direction. They can rise when the Fed cuts and fall when it hikes, because everything else going on in the world is pushing on them too.

Bottom Line

The Fed has raised rates once and has told us it may do it again. For a lot of owners, though, the bigger issue is that long term rates have been moving on their own, so build your financing plan around the index your loan actually uses.

I have been on both the ownership side and the lending side, and the questions that matter are simple ones. What does this loan cost if rates are 100 basis points higher at maturity, and what does the lender need to see to approve it?