Earlier this week we discussed how different members of the Federal Reserve (Fed) have begun to publicly air their views on how the Fed should wind down the significant amount of stimulus it has pumped into the economy during the past few years. The Fed has already begun to taper its quantitative easing program, which should result in increased long-term interest rates, and now it is debating when to raise its benchmark federal funds rate and by how much. The doves at the Fed believe that interest rates should remain low for a longer period of time than their hawkish colleagues, and some of them, like Narayana Kocherlakota, the President of the Federal Reserve Bank of Minneapolis, have stated as much publicly. Private economists also have their own views on this issue and have begun to air them publicly as well hoping that they will catch the ear of the Fed and influence their discussions. Some of them disagree with Mr. Kocherlakota and are advocating that interest rates should be raised more aggressively. If this view becomes more prevalent in the Fed and its members vote to implement such a policy, the cost of borrowing will increase for many consumers and businesses, including senior housing providers. Accordingly, while interest rates remain low, senior housing participants who are interested in obtaining inexpensive capital for growth, acquisitions, and other needs should contact the Chicago-based financing firmCambridge Realty Capital to learn more about the different financing programs that it offers.
The Argument for Raising Interest Rates
Private economists who are advocating that the Fed raise its benchmark federal funds rate make a number of points to support their argument. For example, they point to the run-up in the stock market as a sign of strong economic growth. They also point to a wide range of economic data showing that the economy is now growing at a pace that is fast enough to support a rate increase. For example, bank loans to private businesses are on pace to grow by $700 billion this year, a vast improvement from 2013 when they grew by only $140 billion. Furthermore, as of the end of the first quarter, credit to small businesses reached $4.2 trillion, which represents a year-over-year increase of 3.8%. Vehicle sales in May were also the highest that they’ve been since 2007, indicating that consumers are beginning to feel more comfortable purchasing large-scale items and perhaps even more importantly, they are able to get the credit to do so. Lastly, they make the point that more retirees are seeking safer investments such as bonds and treasuries, and as the demand for bonds increases, the yields will decrease, which will help to keep long-term interest rates low and mitigate the risk of an adverse shock being created by raising the federal funds rate. Hawkish economists argue that all of these factors are inconsistent with keeping the federal funds rate at near-zero and that raising it aggressively after the taper ends is necessary to prevent future asset bubbles, will not hurt the economy, and will also increase the Fed’s flexibility as it continues to exercise monetary policy.
Some of the arguments above will undoubtedly be made by the Fed’s hawkish members during its June meeting later this month. After the Fed releases its post meeting statement we will have a better idea of whose arguments are carrying the day. In the meantime, while interest remains low, senior housing providers should continue to look to Cambridge Realty Capital and the different financing programs that it offers to obtain capital for growth, acquisitions, or other important needs that they have.