The Federal Reserve recently published the minutes from its June meeting and senior housing providers and investors should find the information contained in them very interesting; specifically, the Fed’s confirmation that it will eliminate its quantitative easing program this October. As the Fed winds down this program and begins to reverse other stimulus measures that it implemented in the wake of the last recession, interest rates will start to increase. Before this happens and raises the cost of borrowing for consumers and businesses, senior housing providers and investors who are seeking inexpensive capital for acquisitions or other purposes should continue to look to the Chicago-based financing firm Cambridge Realty Capital for their financing needs.
The Federal Reserve first began reducing the amount of monthly bond purchases that it makes under its quantitative easing program (QE3) in January and this month it will purchase $15 billion in mortgage backed securities and $20 billion in long-term Treasuries under the program. Prior to the release of the minutes from its June meeting, some analysts had expected the Fed to reduce its purchases by $10 billion each month from now until October, and then completely eliminate the program after making a final $5 billion purchase in November. However, the Fed has now confirmed that barring a sudden unexpected change in economic conditions, it will make a final purchase of $15 billion in October and that will be the end of QE3. The Fed believes that ending the program with a final $15 billion purchase in October is preferable to ending the program in November and made this clear with its statement that, “it would be appropriate to complete asset purchases with a $15 billion reduction in the pace of purchases in order to avoid having the small, remaining level of purchases receive undue focus among investors.” By the time it concludes QE3, the Fed will have purchased $1.5 trillion in mortgage backed and fixed income securities and its balance sheet will be well over $4 trillion.
Critics of QE3 and the Fed’s other stimulus measures have voiced concerns that by keeping interest rates low for a prolonged period of time, the Fed has contributed to run-up in stock prices that can’t be sustained and will ultimately result in significant losses when the Fed begins to raise interest rates. These critics will be happy to see QE3 end and will then focus their attention on the Fed’s benchmark federal funds rate they would also like to see the Fed increase. However, the Fed made it clear that the elimination of its quantitative easing program should not be interpreted to mean that it will raise the federal funds rate soon with its statement that “Most participants viewed this as a technical issue with no substantive macroeconomic consequences and no consequences for the eventual decision about the timing of the first increase in the federal funds rate.” Fed officials continue to disagree about the timing of a rate increase and although the recent positive jobs report led some analysts to speculate that the robust gains that took place in June will encourage the Fed to raise rates sooner rather than later, the Fed has not stated that this is the case. The minutes also revealed that most Fed officials favor using the proceeds from its fixed asset holdings to purchase additional bonds that will keep the Fed’s balance sheet high and some speculate could lead to continued low interest rates.
With QE3 now set to officially wind down in October, economists and Fed officials will turn their attention to the federal funds rate and begin debating more thoroughly when it should be raised and by how much. Before this rate goes up, senior housing participants and investors should take advantage of the current low interest rate environment and continue to look to Cambridge Realty Capital for inexpensive capital that they can use to refinance their debt, acquire additional senior housing assets, or for a host of other purposes as well.