Earlier we discussed how Wall Street, Federal Reserve members, and Fed futures traders all have different opinions on when interest rates will rise and by how much. This lack of consensus should come as no surprise when considering that opinions differ markedly within the Federal Reserve itself. At the Fed, opinions run the gamut from raising interest rates during the second or third-quarter of 2015, to raising them right away. The timing and size of future interest rate hikes is very important to the senior housing industry because of the way it will impact valuations, mergers, acquisitions, and other activity in the sector. Accordingly, senior housing providers should keep an eye on pronouncements from Federal Reserve officials so that they can get an idea of when the central bank will raise interest rates, and incorporate that information into their plans for the future.
The Federal Reserve Should Wait to Increase Interest Rates
William Dudley, the President of the Federal Reserve Bank of New York and a member of the Federal Reserve’s policy making Open Market Committee, recently gave a speech in which he argued that the Federal Reserve should hold off on raising interest rates for now. Mr. Dudley takes this position because he believes that raising interest rates too soon is more risky for the economy than raising them too late. He also believes that, even though the economy is growing at a steady clip and the unemployment rate is below six percent, the stimulus provided by low interest rates is still needed for the Fed to achieve its goals of maximum employment and price stability. When asked when he thought the Fed should raise interest rates, Mr. Dudley declined to give an exact date because he feels that the timing of any increase should be data dependent. However, he did say that Fed watchers projections of an increase during the middle or latter half of next year do seem reasonable to him.
The Federal Reserve Should Raise Interest Rates Right Now
In contrast to Mr. Dudley, Charles Plosser, the President of the Federal Reserve Bank of Philadelphia and one of the more hawkish officials at the central bank, has advocated for months that the Federal Reserve should raise interest rates right now. The Fed has kept its benchmark federal funds rate at near zero since December 2008, and Mr. Plosser finds this particularly disconcerting because there is no historical precedent for keeping rates this low, for so long. In addition, he believes it creates the potential for sustained low rates to create harmful asset bubbles which could damage the economy significantly when they pop. Mr. Plosser also believes that the economy and labor markets improved to the point where the stimulus provided by near zero fed funds rates is no longer necessary, and that these improvements are another reason why the Fed should raise interest rates today.
Time will tell whether Mr. Dudley’s or Mr. Plosser’s opinion are more accurate, but one thing is for certain, and that is that the Federal Reserve will raise interest rates at some point in the future. Before it does, senior housing providers and investors who are seeking capital for acquisitions or other purposes should contact Cambridge Realty Capital to learn more about the many different financing options that it offers for a wide range of senior housing transactions.