January 4, 2013
Interest Rates Unlikely to Rise Despite Fed Statements
Many people were surprised to hear that some of the Federal Reserve’s policy-makers want to curtail the central bank’s aggressive monetary easing policy. These statements are particularly surprising, given the previously released statement that the Federal Reserve intended to keep interest rates low until unemployment fell to 6.5 percent.
The news of the Federal Reserve policy-maker’s feelings regarding the monetary easing policy has caused a great deal of overreaction. The Federal Reserve is now entering its fifth year of aggressive easing strategy meant to push interest rates down, make borrowing cheaper, stimulate spending and drive investors out of safe assets like bonds into riskier assets like stocks. While the strategy has been controversial, it has appeared to boost stock values, made it easier for consumers to buy cars and helped the housing market begin its recovery. In addition, for those in the senior living and nursing home industry, it has meant historically low interest rates for financing new acquisitions and property additions.
Unfortunately, the Federal Reserve’s policy cannot last forever and no one knows exactly when it will end. The consequences of a reverse in course or, even worse, a loss of control over inflation requiring an abrupt hike in rates, could be severe. Even a slight rise in interest rates could convince the market that interest rates are headed back up, and could cause a panic, thereby erasing many of the gains in the last year. Of course, a rise in interest rates could also cause significant difficulties for the nursing home industry.
It is obvious that a rise in interest rates would make it more expensive for owners to acquire new properties and to construct additions to existing properties. However, there are other consequences that may come to pass. For example, higher interest rates could hurt the housing market, and if seniors are unable to sell their homes, they may not be able to move into a nursing home or senior living facility.
On a positive note, it is unlikely that interest rates will rise in 2013. It is unlikely that the unemployment rate, which currently sits at 7.8 percent, will fall to 6.5 percent during 2013. In addition, while the economy has made strides, it is still a long way from recovering to the point that the Federal Reserve will likely consider a rate hike. Most likely, the Federal Reserve will hold off on any rate hikes until 2014 or later. However, until the Federal Reserve actually chooses to raise interest rates, there will be a great deal of conjecture.