At its May meeting, the Federal Reserve took the position that it won’t panic if inflation stays slightly above the normally-desired 2 percent rate, presumably at least until its June 12 meeting. All signs seem to point to another interest rate hike at that time.
Although the Fed’s seemingly nonchalant approach to the current inflation rate is a bit of a surprise to some economists, the proposed rate hike is not, according to Cambridge Realty Capital founder and chairman Jeffrey Davis.
Interest rate increases were already on the table when new Fed chair Jerome Powell took over the position from Janet Yellen earlier this year. The first increase happened in March. The next one will almost certainly occur in June. There will be at least one more before the end of 2018, and some speculate there may even be a fourth before the calendar turns over.
The successive interest rate increases have been proposed and implemented after an unprecedented extended period of historically low interest rates. The Fed made the drastic move to slash interest rates to near zero percent to help spark economic recovery after the recession of 2008.
The proposed rate increases, along with the ones that have already taken effect, were implemented to curtail inflation after what has been a long-awaited turnaround in the economy. Raising the interest rate has both benefits and drawbacks. “No one really wants to pay a higher interest rate on a loan,” Davis remarked. “However, on the other hand, a healthier economy indicates that qualified borrowers are benefiting from the increased economic activity and can handle a higher rate.”
In spite of the 2008 market crash, business has remained relatively brisk for Cambridge over the last ten years. “There will always be a market for senior housing and skilled nursing care,” Davis stated, adding, “HUD 232 loans remain a staple loan product regardless of the state of the economy.” Cambridge Realty Capital has been specializing in providing HUD funding since the 1990s.
Far from having a negative impact, Davis reports that recent interest rate increases have actually helped Cambridge’s business. “Owners are much more motivated to lock in fixed rates and get off variable rate loans. Rates increasing has created much better loan demand.”
In fact, Cambridge’s name recently appeared in sixth place on a list of the top 35 HUD 232 lenders in the US. Considering that Cambridge is competing against many larger companies, including money center banks, sixth place is an impressive finish.
Higher inflation has not hurt Cambridge’s business as of late, either. “However,” Davis predicts, “I expect inflation impact to be forthcoming and with it higher costs, higher construction costs, higher labor costs, and other impacts of inflation.”
The Fed will be holding its second quarterly meeting after its June 12-13 meeting.