Last week’s passage of the 2025 Tax Bill includes many real estate-related tax provisions (see below) and a $5 trillion increase in the debt ceiling. The debt ceiling increase put the Treasury back in the business of issuing new Treasury bonds and bills. As interest payments consume an ever-growing share of the budget, concerns regarding the sustainability of the national debt and America’s ability to respond to future crises grow, along with the possibility of “bond vigilantes” demanding increasing yields on Treasuries. This week’s auction of $39 billion of 10-year Treasuries was well received: a solid “bid-to-cover” ratio indicating strong demand from investors. The final yield of 4.36%, lower than the opening yield. Investors included “indirect bidders,” likely foreign central banks. The auction helped assuage concerns about waning demand for U.S. assets. The U.S. Dollar Index rose this week against other currencies. Looks like the “bond vigilantes” are at bay, for now.  

Powell/Fed: Powell is facing increasing political pressure to lower rates. Fed “independence” is important, as financial markets rely on predictable, consistent monetary policy. When the Fed is seen as independent, its commitments carry more weight. The dollar’s status as the world’s primary reserve currency partly depends on confidence in U.S. monetary policy. Powell has said that he believes the Fed would have already cut rates if it weren’t for the April tariff announcements. Disinflation had been occurring, along with some labor market softness. That means the Fed’s recent “pause” was due to worries of tariff-induced inflation. This position, however, is evolving: trade agreements (or outlines of future agreements) are being announced, deadlines are being delayed to accommodate further negotiations, and some major retailers have indicated they don’t plan to raise prices. Two Fed Governors (Waller and Bowman) have spoken about the possibility of cutting rates at the July 30 meeting (are they “auditioning” to succeed Powell?). Former Fed Governor Robert Kaplan of Goldman Sachs opined that it is much easier for businesses to absorb cost increases and avoid price hikes “if the average tariff is closer to 10% to 15% rather than the high levels announced on Liberation Day.”

He also indicated that, due to weaker domestic demand and global overcapacity, tariffs “may not be as inflationary as we fear.” Powell himself has also dialed down his tariff/inflation talk in recent weeks. “I wouldn’t take any meeting off the table or put it directly on the table,” he added. A “solid majority” of the central bank’s policymakers are forecasting rate cuts this year and see cuts “sooner rather than later” if inflation pressures remain contained. This scenario, however, is not assured: many retailers and manufacturers stocked up on purchases in advance, which will delay price increases into Q4 or even next year. Also, as we go to press today, a 35% tariff on Canadian imports (with some exceptions) is being announced.

Fed meeting minutes released yesterday show a divided group. Ironically, some Fed officials are touting another “transitory inflation” narrative, like 2022. Will it be different this time?

So, When? There are four Fed meetings remaining this year, July, September, October, and December. Fed futures contracts indicate a 93% probability of no cut at the July 30 meeting. The Data: If the tariff announcements are causing inflation, the earliest indications would come in the June/July economic reports, which are released in July and August.  Also, the big tariff implementation deadline is now August 1. Thus, the likelihood of another “pause” meeting. However, the September 17 meeting has a 69% futures probability of a rate cut, while the December 10 meeting shows an 80% probability of a second cut. So, maybe one in September and another in December.

And what about Powell? Candidates for the next Fed Chair, to be appointed in May 2026, include Treasury Secretary Bessent, Kevin Hassett (White House economic advisor), and former Fed Governor Kevin Warsh, who was passed over in 2018 so Powell could be nominated.  Shadow Fed Chair? With a vacancy on the Fed Governors Board coming up in January, a “shadow Chair-in-waiting” could be appointed at that time; someone who may undermine Powell’s authority, both publicly and privately. Additionally, Jerome Powell‘s term as Chair also ends in May 2026, though he can remain on the board until 2028 (which would be unusual, Fed Chairs usually retire from their Board of Governors seat at the end of their term).

Next week: CPI and PPI reports, Fed speeches all week, more trade agreements (?). Stay tuned…

By David R. Pascale, Jr., Senior Director at George Smith Partners.

2025 Tax Bill – Key Real Estate Provisions

• Permanent 20% pass-through deduction (Partnerships, LLCs, and S corporations).
• Restored and expanded 100% bonus depreciation and Section 179 expensing (this will expire in 2 years): Real estate businesses can accelerate deductions (or in some cases immediately deduct cost of qualifying property) on property improvements and equipment. 
• Interest Deduction (Section 163(j)): The calculation reverts to the original TCJA method, allowing businesses to compute adjusted taxable income without subtracting depreciation, amortization, or depletion. This change increases the allowable interest deduction. 
• Revamped and permanent Qualified Opportunity Zone (QOZ) program:
  • Post-2026 investments must recognize gains after five years (with a 10% basis bump). 
  • Beginning late-2026 new zones will be introduced every 10 years. Note that the “rural opportunity zones” category, offering even more generous incentives, including a 30% basis increase when held for 5 years and a reduced 50% threshold for substantial property improvements. 
  • QOFs and Qualified Opportunity Zone Businesses (QOZBs) will both be subject to expanded reporting requirements. The bill also removes adjacent areas with high demographics from qualifying as those neighborhoods are already attracting capital. 
• Real Estate Investment Trust (REIT) flexibility and Low-Income Housing Tax Credit (LIHTC) program: 
  • 2026: REITs can hold up to 25% of assets in qualified subsidiaries.
  • The LIHTC program receives a restored 9% fixed credit rate, a permanent 12% increase in annual state credit allocations, and a reduced bond financing threshold for 4% credit projects. 
• Permanent New Markets Tax Credit: Like the Senate Finance Committee reconciliation bill, the final reconciliation bill makes the new markets tax credit (NMTC) permanent at $5 billion in annual allocation authority, which will generate a total of $1.95 billion in tax credits over seven years.