The Federal Reserve raised its benchmark rate 25 basis points on Wednesday, its first increase since 2023, with inflation still sitting above the 2% target. Construction economists spent the rest of the day disagreeing about what it means, and the disagreement is more useful than a consensus would have been.
Why higher rates may never show up as cancelled projects
Michael Guckes, chief economist at ConstructConnect, sees the damage happening before anyone counts it. “Projects that were on the edge of meeting their profitability goals may now be falling short,” he told Construction Dive. “Such projects will not go to bid.” That’s the quiet version of a rate shock. Nothing gets cancelled because nothing gets announced.
The louder version hits work already in the ground. Short-term credit and revolving loans tied to the prime rate reprice immediately, which squeezes owners mid-job. Guckes’ worst case is an owner who pauses or abandons, leaving the contractor with immediate expenses and receivables that are hard to recover.
Brian Strawberry, chief economist at FMI, reads it the other way. Commercial real estate doesn’t borrow off the overnight rate; it borrows off long-term Treasury yields. “A hike that convinces markets the Fed is serious about inflation tends to pull the 10-year down, and that is where construction actually borrows,” he said. Both men sell market data and consulting for a living, which is worth remembering when weighing either view. Neither figure is independently verified.
Construction cost escalation is the number that hasn’t moved
Where they agree is the part contractors already knew. Nonresidential construction input prices rose 8.9% year over year in August, with several major materials up double digits. Kenneth Roberts, who chairs the construction law group at Venable, put it plainly: “I don’t see any data that suggests that in the next six months, the inflation that the construction industry has experienced in the last year is going to decrease.”
Strawberry’s read is that materials escalation is running well ahead of what contractors are getting in bid prices, and that’s what’s thinning the pipeline of new starts. Rates are a smaller variable than the price of steel, switchgear and copper.
The exposure isn’t evenly spread
Housing and private commercial development are the rate-sensitive segments. Data centers and semiconductor plants aren’t, because they’re funded out of corporate cash flow and government incentives rather than construction loans, though that’s Strawberry’s characterisation rather than a measured finding. Public work sits somewhere else again: programmes like the Bourne Bridge replacement live or die on federal grant awards, not on the discount rate.
Guckes had one more observation worth filing. “In the modern era, Fed rate movements have come in waves.” A single 25-point move is not a policy. It’s the first data point in one.