To date we have discussed how the Federal Reserve used its Beige Book and the slowdown in the global economy during its deliberations on future interest rate hikes. The timing and pace of these hikes is very important to a number of different industries, including senior housing. Senior housing mergers and acquisitions have been on a tear this year, partially because of low interest rates. Accordingly, when rates go up, it is likely that this activity will slow down, and that property valuations will be affected as well.
We also discussed how Charles Plosser, the President of the Federal Reserve Bank of Philadelphia, would like the Federal Reserve to raise interest rates “sooner rather than later.” Mr. Plosser wants the Fed to do this because he believes that the economy and job market improved faster than the Fed projected, and that the stimulus provided by near zero interest rates is no longer necessary. He also believes that keeping interest rates so low for a long period of time will eventually lead to unsustainable asset bubbles that will hurt the economy when they pop, and high rates of inflation that will do the same. Mr. Plosser’s views are shared by some members of the Federal Reserve, but not by Charles Evans, the President of the Federal Reserve Bank of Chicago.
A Federal Reserve Dove Advocates Keeping Interest Rates Low
In a speech he recently gave at a conference in Indiana, Mr. Evans summarized his views on interest rate hikes by saying, “The biggest and costliest downside risk is that in our haste to get back to ‘business as usual’ monetary policy, we could stall progress and backtrack to the economic circumstances of recent years,” which were characterized by small growth rates. According to Mr. Evans ,“[The Fed] should be exceptionally patient” in raising interest rates, and should not raise them until early 2016, a full half-year later than most analysts are projecting. Mr. Evans feels this way because he believes that, even if the Fed keeps interest rates very low, it could still take the economy another three years to reach its goals of full employment and two-percent inflation. His projections differ from Mr. Plosser’s, who believes that the Fed will achieve its employment and inflation goals earlier, and this helps explain the difference in their positions.
Although both Mr. Evans and Mr. Plosser are respected members of the Federal Reserve, neither of their views represent the majority opinion at the central bank. Mr. Plosser believes that rates should rise much earlier than most of his colleagues, and Mr. Evans believes that they should rise much later than most of his colleagues. However, one thing they both agree on is that the current near zero level is unsustainable in the long-term, and will increase at some point. Before this happens, and the cost of capital increases for businesses, senior housing providers should contact Cambridge Realty Capital to learn more about the many different financing optionsthat it offers for acquisitions, sale/leasebacks, joint ventures, and other purposes as well.