Does it really matter exactly when the Fed raises short-term interest rates?

Fed Chair Janet Yellen keeps urging anyone within earshot that they shouldn’t put so much effort into discerning the precise timing of the Fed’s decision to raise rates.  What really matters, she assures everyone listening, is what happens after that.

“What should matter is the entire trajectory, the entire expected trajectory of policy,” she said at a recent news conference.

The Fed has not raised short-term rates since 2006.  Cambridge Realty Capital Companies Chairman Jeffrey A. Davis says Ms. Yellen primarily aimed her remarks at the investment community and those in the media who tend to obsess over the timing for the most important call she will preside over at the Fed.

Effectively, the Fed Chairman is asking markets to think about interest rates as an economist does.  To an economist, market interest rates reflect the entire expected future path of short-term interest rates, Mr. Davis explained.

“The question is, how should senior housing/healthcare borrowers be viewing a projected bump in short-term rates that could come in September, December or sometime in 2016?”

Cambridge is one of the nation’s leading senior housing/healthcare lenders, with more than $4 billion in closed transactions. Mr. Davis says healthcare borrowers that qualify for popular HUD Section 232 loans easily identify with the long-term economic benefits of these loans.

“The economic advantage gained by these borrowers can extend up to 40 years, or whatever the specific term length for their loan might be.  Interest rates will assuredly rise from current levels, but not for borrowers who have locked in today’s bargain basement rates,” he said.

But the starting point remains important for healthcare borrowers.  When the Fed will eventually raise short-term rates is anybody’s guess, but the recent global stock market sell-offs in the U.S. and elsewhere around the globe most likely eliminates September as a viable option.

The point is, getting the rock-bottom rate is desirable but difficult to plan if the healthcare borrower is applying for HUD 232 financing at this time.  For a 30- or 40-year term loan, even a small rise in rates can make a substantial difference in the amount of money saved over time.

“There’s an inevitable delay between the time an application is completed and submitted and when the loan is improved. However, given the current economic climate in the U.S. and elsewhere, it’s unlikely rates will be accelerating rapidly anytime soon.

“We continue to tell our clients that it’s advisable for them to make a move at their earliest convenience,” Mr. Davis said.

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