Economic Outlook

New Federal Reserve Leadership Begins Shaping Policy Direction
Kevin Warsh officially assumed leadership of the Federal Reserve System in May, and his first FOMC meeting in June signaled a shift toward less forward guidance and a more traditional inflation-focused policy framework. Markets are closely evaluating how his leadership style could impact rate policy and volatility going forward.

Federal Reserve Maintaining a Restrictive Rate Environment
Despite leadership changes, policymakers have maintained a cautious stance as inflation remains above the long-term 2% target. Current expectations suggest any meaningful rate cuts may be delayed until later in 2026.

Inflation Pressures Continue to Ease Gradually
Core inflation has moderated compared with 2025 levels, supported by improving supply chains and slower consumer demand. The energy sector has been the largest contributor to inflation. As oil prices descend lower, inflation should ease in the second half of the year.

Economic Growth Slowing but Recession Risks Remain Limited
U.S. GDP growth continues moderating as higher borrowing costs pressure consumer spending, business investment, and corporate expansion. Consensus forecasts point toward slower growth rather than a sharp contraction.

Credit Markets and Lending Conditions Remain Tight
Banks continue tightening underwriting standards across corporate and commercial lending sectors. Higher financing costs are slowing refinancing activity, reducing transaction volumes, and creating continued pressure across rate-sensitive sectors, particularly commercial real estate.

Commercial Real Estate Update

Fundamentals Stabilizing but Sector Performance Remains Uneven
Leasing demand has improved modestly across several property types, though performance continues diverging by sector. Industrial and data centers remain strong performers, while office fundamentals continue lagging as hybrid work patterns keep vacancy elevated.

Capital Markets Activity Gradually Recovering
Transaction volumes are beginning to improve as buyers and sellers slowly adjust to the higher-for-longer interest rate environment. Lending spreads have tightened modestly, but underwriting standards remain conservative across most asset classes.

Refinancing Pressure Building Across Maturing Debt
A large wave of loans originated during the low-rate period of 2019–2022 continues approaching maturity, creating refinancing challenges for borrowers facing materially higher debt service costs. This remains particularly acute in office and transitional asset classes.

CMBS Market Showing Improved Issuance Trends
New issuance in the Commercial Mortgage-Backed Securities market has improved compared with the first half of 2025 as fixed-income investors return and pricing volatility moderates. However, special servicing activity remains elevated, particularly among legacy office loans.