If the Federal Reserve Board was using developments in the senior housing/healthcare industry as its inflation barometer, all of the speculation that continues to swirl around when the Fed will start raising interest rates would not be part of the conversation.
Cambridge Realty Capital Companies Chairman Jeffrey Davis says the Fed has a dual mandate of keeping inflation in check while maximizing employment. Low rates can help spur investment and create jobs but run the risk of leading to inflation.
Since the Fed dropped interest rates to historic lows seven years ago, jobs have come back and the headline unemployment rate, which does not count jobless people who are not actively seeking employment, now stands at just over 5 percent. However, core inflation measures have stubbornly stuck below the Fed’s 2 percent target.
In a press briefing, Fed Chairman Janet Yellen reported that “transitory” pressures were keeping inflation down. According to the Fed’s model, roughly 80 percent of the shortfall in expected inflation can be explained by the recent strengthening of the dollar and low energy prices.
However, these factors do not appear to be curtailing enthusiasm in the senior housing/healthcare market, where property values are up 30 percent over the past 36 months. Home prices nationally have been on the rise in many markets as well, Mr. Davis said.
He noted that some market experts are urging the Fed to raise interest rates even with inflation below the target rate. A familiar refrain argues that keeping interest rates at an absolute minimum leaves the central bank without ammunition should a recession hit.
“But it’s hard to find economic experts who believe this outcome is likely anytime soon,” he added.
In other economic developments, second quarter GDP growth came in at a surprisingly brisk 3.9 percent. And consumer spending ticked up in August.
“It may not happen later this year, but Cambridge is advising clients that a long-anticipated rise in interest rates is in our short-term future,” Mr. Davis said.