The global economy experienced a bit of a slowdown earlier this month. In addition to causing a decline in the stock market, the slowdown also affected the Federal Reserve’s deliberations on interest rates. Most Fed watchers still expect the central bank to raise interest rates sometime during the middle of next year, but the situation is fluid and could be affected by a prolonged slowdown in global economic growth.
Earlier this month, the International Monetary Fund (IMF) reduced its forecast for global economic growth this year to 3.3 percent, and to 3.8 percent for 2015. This complicates matters for the Federal Reserve because, if it raises interest rates too quickly, it might damage the global economy, which would ultimately hurt the U.S. economy as well. But if it waits too long to raise interest rates, then it runs the risk of encouraging inflation and creating unsustainable asset bubbles that could cause lasting damage when they pop.
The IMF’s revised forecasts also ignited a series of discussions among economic players across the globe, ranging from how to boost the Eurozone economies to the adverse effects a prolonged slowdown could have on the U.S. economy. A lengthy slowdown in global economic activity would hurt the U.S. economy by reducing the amount of goods that companies based in the United States can export, or sell in foreign markets. If exports fell by a large enough number, the economic impact could be significant. This is one of the main reasons that the Federal Reserve is keeping a close eye on the global economy.
If the Fed believes that a significant global slowdown is about to take place, then it might consider delaying any interest rate hikes until late 2015 or even sometime in 2016. This sentiment was recently expressed by Fed Vice Chairman Stanley Fischer at an event that was sponsored by the IMF. At the event, Mr. Fischer stated that, “If foreign growth is weaker than anticipated, the consequences for the U.S. economy could lead the Fed to remove accommodation more slowly than otherwise.” And Mr. Fischer is not the only Federal Reserve official that feels this way. Other officials such as Fed Governor Daniel Tarullo have also gone on record highlighting the important role that global economic conditions play in the Fed’s deliberations on interest rates.
While the Federal Reserve does look at global economic conditions when deliberating interest rate hikes, it is just one of many factors that the central bank considers. Some of the others, such as domestic economic growth, inflation, and the U.S. job market carry more weight during these deliberations than the global economy. Accordingly, many Fed watchers believe that unless there is a dramatic andsignificant slowdown in global economic growth, the Fed will still raise interest rates sometime early next year. Before this happens, senior housing participants who are seeking capital for acquisitions, joint ventures, sale/leasebacks, or other purposes should contact the Chicago-based financing firm Cambridge Realty Capital to learn more about the many different options that it offers for these and other transactions as well.