After the Federal Reserve (Fed) met last week, it announced that it would continue to taper its quantitative easing program by another $10 billion each month but would not change the federal funds rate from its current level of 0% to .25%. This announcement was in line with analysts’ projections so it did not come as a surprise to them. Since its announcement, other information regarding the Fed’s thinking has come to light that analysts can use in future projections to help determine what actions the Fed will take with respect to monetary policy and how this will impact the country’s businesses, including those in the senior housing industry.
Some of the new information that has become available has come from Richard Fisher, the president of the Federal Reserve Bank of Dallas. Mr. Fisher is considered a “hawk” on monetary policy, meaning that he’s more concerned about inflation than many of his colleagues at the Fed. For example, at a speech in Hong Kong in April Mr. Fisher stated that credit markets in the U.S. are “awash in liquidity” and as the stock market continued to flirt with record highs, its valuations should “give rise to caution.” With these statements he’s essentially saying that the Fed’s policies might be contributing to a bubble that could damage the economy down the line and the best way to avoid this is to pare back Fed stimulus sooner rather than later, particularly by raising short-term interest rates.
Mr. Fisher also appeared on the Fox News program “Sunday Morning Futures” last weekend and although he is only one of twelve members on the Federal Reserve’s Open Market Committee, his comments on the program are still helpful in determining what actions the Fed might take in the future. For example, Mr. Fisher made it clear that he believes the economy is doing well enough for the Fed to continue tapering its quantitative easing program with his comments that the economy is “moving in the right direction” and is “getting stronger.” He also noted that job gains in the private sector have picked up with his statement that “We are continuing to see job creation”and that despite the labor force participation rate being the lowest it has been in nearly 40-years, people who have left the labor force will return and “will start looking for work, join the workforce, [and] be hired, as business expands in the United States.” This comment shows that Mr. Fisher isn’t as concerned about the low labor force participation rate as many others. Furthermore, he attributes this problem more to a skills shortfall or mismatch between employers and job seekers than to any particular economic policy. Indeed, Mr. Fisher made this clear with his statement that in many parts of the country “there are jobs available in certain high-skilled areas, but we don’t have the educational basis for it or we don’t have the immigrant pool for it, whatever it may be.” One of the sources of information that Mr. Fisher bases this belief on is the Fed’s April Beige Book which reported that employers in six of its twelve districts had problems finding skilled workers to hire. But perhaps the most important comments Mr. Fisher made were on his expectation that the Fed will end its quantitative easing program in October and will focus on the federal funds rate after that.
Mr. Fisher’s comments confirm what was already generally well known, that the Federal Reserve will be rolling back its economic stimulus in two phases, with the first phase addressing quantitative easing and the second phase addressing short-term interest rates. Most economists expect the Fed to raise interest rates in the middle of next year. This means that if it were to end its quantitative easing program in October as Mr. Fisher believes, the economy would have roughly 8-9 months to grow to a point where the Fed feels comfortable rolling back its stimulus even more by increasing short-term interest rates. This period is nearly a year long and seems like enough time for the economy to prove its strength to the Fed. Of course, the future hasn’t been written yet and something might happen to disrupt this timeline, but for now most analysts believe that it’s a fair time frame and that Mr. Fisher’s comments supports their projections of an increase in rates in or around June 2015. Before this happens, senior housing providers and investors should take advantage of today’s current low interest rates by continuing to look to the successful financing firm Cambridge Realty Capital for their financing needs with respect to purchasing senior housing assets, obtaining capital for a joint venture, or obtaining capital for other senior housing related transactions they would like to engage in.