Last week, Federal Reserve Chairman Janet Yellen gave her semiannual report to Congress. Her testimony to the Senate Banking Committee was particularly instructive and covered a wide range of topics including the economy, the labor market, interest rates, inflation, and asset bubbles. Fed watchers and others who have a stake in the Federal Reserve’s monetary policy will find her testimony revealing as it provided some clues into the Fed’s thinking and where it might go with interest rates in the future. Before interest rates rise as they are expected to, senior housing providers and others who would like to obtain inexpensive capital to acquire senior housing assets or for other purposes should continue to look to the Chicago-based firm Cambridge Realty Capital for theirfinancing needs.

Interest Rates to Remain Low

The Federal Reserve has kept its benchmark federal funds rate at or near zero since December 2008, but now, because of the unemployment rate recently falling to its lowest rate in 5 years, and fears of growing asset bubbles and the potential for increased inflation being created by prolonged low interest rates, the drumbeat for the Fed to raise the federal funds rate and return interest rates to a level that is closer to historical norms has been growing steadily. In contrast to these views, Ms. Yellen has stated in the past that the Fed will continue to keep interest rates low for a “considerable time” after it concludes its quantitative easing program this October. She reiterated this stance in her testimony and also addressed the drop in the unemployment rate, asset bubbles, and concerns over future inflation.

With respect to the unemployment rate falling to 6.1%, Ms. Yellen was happy to see this, but was also quick to point out that part of the reason it has fallen quicker than the Fed originally projected is because a sizable number of people have stopped looking for work and because of this, they are no longer counted among the unemployed even though they do not have a job. She also pointed out that wage growth is still depressed indicating that employers have a lot of leverage when they hire workers, which means that the labor market is still operating below capacity. Lastly, she reiterated her belief that the Fed should keep interest rates low until labor conditions and wage growth improves.

Asset Bubbles

With respect to asset bubbles, Ms. Yellen did acknowledge that valuations for some junk bonds and shares of some smaller technology companies appear to be excessive, but in her opinion, that isn’t enough of a reason to raise interest rates just yet. Also, when discussing inflation, Chairman Yellen noted that inflation is still below the Fed’s 2% target rate and that companies aren’t dealing with cost pressures that would normally force them to raise prices because wages aren’t growing and the cost of raw materials remains flat. Ms. Yellen did appear open to changing course with her statement that “If the labor market continues to improve more quickly than anticipated by the committee, resulting in faster convergence toward our dual objectives, then increases in the federal funds rate target likely would occur sooner and be more rapid than currently envisioned.”However, she also went on to say that “Conversely, if economic performance is disappointing, then the future path of interest rates likely would be more accommodative than currently anticipated.”

Lastly, Chairman Yellen reiterated her view that the economy will continue to grow at a moderate pace for the rest of the year and her testimony overall seemed to indicate that barring anything unusual, the Fed will stay on its current course and will continue to keep interest rates low for “a considerable time” after it ends its quantitative easing program. And while Fed watchers are not sure just how long “a considerable time” is, the general consensus among them is that the Fed will raise rates sometime during the first or middle part of 2015. Before this happens and the cost of borrowing increases, senior housing participants and investors who are seeking inexpensive capital should contact Cambridge Realty Capital to learn more about its many different financing programs.

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