With the economy on the mend, the unemployment rate dropping, and the Federal Reserve winding down its quantitative easing program, Federal Reserve members are increasingly turning their attention to the central bank’s benchmark federal funds rate, and debating when to increase it from the near zero level where it has stood since December 2008. One Fed member in particular has spoken at length on this subject, and her views provide insight into the debates going on now at the Fed.
Esther George, president of the Federal Reserve Bank of Kansas City, recently gave a lengthy speech at the bank’s agricultural symposium. Ms. George is one of the chief hawks at the Federal Reserve, and this was reflected in her speech. Ms. George pointed out that, while the economy is recovering more slowly than after prior significant recessions, it is growing nevertheless, and has for the past five years. After a difficult first quarter where it unexpectedly contracted, it quickly bounced back in the second quarter, and is expected to grow for the remainder of the year. Furthermore, over the past year, the unemployment rate declined at its fastest pace in 30 years, and now stands at 6.2 percent, its lowest level since December 2008. While Ms. George acknowledges the job market is still afflicted by low labor participation rates and weak wage growth, she is also quick to point out that other broader measures of employment improved in recent years, and such improvement indicates genuine growth in the labor market. Ms. George believes the economy’s growth, in conjunction with gains in the labor market, prove the Federal Reserve should increase interest rates sooner rather than later.
In addition to economic growth and job gains, Ms. George also wants the Federal Reserve to raise rates out of concern for potential asset bubbles forming due to a prolonged low interest rate environment. Ms. George points to high asset valuations and aggressive lending taking place in the leveraged loan, subprime auto lending, and corporate bond markets. She worries that investors are becoming conditioned to expect the Fed’s loose monetary policy to continue indefinitely. This, she believes, is detrimental to the financial markets, as the formation and subsequent bursting of asset bubbles could lead to widespread economic damage and the elimination of large amounts of wealth. When the economy faltered in the past, the Fed would lower the fed funds rate in order to stabilize the situation. However, if the rate stays near zero, this would impossible.
It is unclear how many of Ms. George’s colleagues at the Federal Reserve share her point of view. Fed Chairman Janet Yellen and her fellow doves on the Federal Reserve’s Open Market Committee take the opposite view. Ms. Yellen made this clear with her oft-stated comment that the Federal Reserve will keep interest rates low for a “considerable time” after it concludes its quantitative easing program in October. Yet if the economy continues growing at healthy rate, the labor market continues improving, inflation creeps up, and bubbles appear to form in some areas of the economy, more Fed officials might be swayed by Ms. George’s arguments. In that event, they could end up voting to increase the federal funds rate sooner than originally planned. While no one knows for sure when the Fed will raise interest rates, many analysts believe Fed officials will vote for an increase in the first half of 2015. Before this happens, and the cost of borrowing increases across the board, senior housing providers and investors seeking capital to acquire additional assets for their portfolios, or to engage in a joint venture or sale/leaseback, should contact Cambridge Realty Capital to learn more about the many financing options it offers for these and other purposes.