Last week Federal Reserve Chairman Janet Yellen gave a speech at the Economic Club in New York that provided valuable insight into her thinking and how she would like the Fed to proceed in exercising monetary policy. After five years of keeping the federal funds rate at or near zero, the Federal Reserve (Fed) is finally poised to raise it sometime in the future. However, no one is exactly sure when this will happen. Chairman Yellen’s speech gives some additional insight into the timing of future rate increases which is important for the senior housing industry because of the impact that rate increases will have on the cost of capital, acquisitions, expansions, investments, and other transactions as well.
Chairman Yellen started off her speech by emphasizing the gains that the economy has made in the last five years. She noted that more than 8 million jobs have been added to non-farm payrolls during this period, that the auto industry which was on the verge of collapse during the recession is now stable again, that manufacturing output is almost back to pre-recession levels, and that while the housing market hasn’t returned to pre-recession levels, it does appear to have turned a corner and is much more stable now than it was previously. She also noted that at its current rate of 6.7%, unemployment has decreased by almost a full percentage point since late last year and inflation has decreased from roughly 2.5% in 2012 to less than 1% in February.
In more positive news, Ms. Yellen also stated that while some economic indicators were weak in recent months, particularly the jobs reports from January and February, this was partially due to the extreme weather the country experienced during the winter and now that winter is over, Ms. Yellen expects to see improvements in retail, construction, and hiring as well. Furthermore, Ms. Yellen stated that the consensus among members of the Federal Reserve’s Open Market Committee is that the unemployment rate will be at 5.2% to 5.6% by the end of 2016 and inflation will be at 1.7% to 2.0%. If this happens, the economy would be approaching what the Fed views as full employment and price stability at the same time, for the first time in nearly 10 years.
The Federal Reserve’s statutory mandate is to maximize employment and maintain price stability. This requires the Fed to constantly monitor the unemployment and inflation rates. However, Chairman Yellen also noted that she and her colleagues spend a lot of time looking for other signs that could indicate that the Fed’s projections in these areas and with respect to overall economic growth, won’t be met and need to be updated. When they see these signs, they not only update their projections, but they might also alter the Fed’s monetary policy as well. For example, they might raise rates sooner than they expected to if the economy grows at a faster rate than projected, or they might keep them low longer than they expected to if the economy suddenly cools down unexpectedly. For these reasons, it’s important to know what signs the Fed keeps it eye on and Chairman Yellen remarked on a few of them during her speech. For example, she mentioned the labor force participation rate, the number of long-term unemployed, wage pressures, fiscal drags that could be caused by policies enacted by Congress and the President, and banking and sovereign debt issues in Europe. Lastly, Ms. Yellen also noted that because the economy can be affected by events that are hard to predict, it is important that the Fed maintain flexibility so that it can properly respond to these situations if it needs to. An example of such an event is the current situation in Ukraine which has the potential to affect many of Europe’s largest economies and some U.S. exports.
While Chairman Yellen didn’t announce any new policies during her speech, her comments on the factors that the Fed looks at when determining monetary policy and its projections regarding unemployment and inflation were highly instructive. Essentially, what Ms. Yellen is saying is that the Federal Reserve will maintain its current course of winding down its quantitative easing program and preparing to raise rates in the future if its projections hold and there aren’t any unexpected material shocks in the factors it looks at when determining monetary policy. Accordingly, before the Fed’s projections are met and it increases interest rates, senior housing participants and others who are interested in obtaining capital for growth, acquisitions, or other reasons, should continue to look to the successful financing firm Cambridge Realty Capital and the many different options it offers for their financing needs.