Top Economists Predict The Fed's 2016 Decisions, And Their Real Estate Impact
The Fed loves to keep us guessing. After 2015's will they or won't they rate hike saga, the central bank raised its target interest rate at the end of the year, with plans to hike it up to four times in 2016. With the Fed's March meeting fast approaching, questions abound about whether they'll stick to their plan even after seeing global economic turmoil and the worst January in seven years.
Bisnow asked elite economists to weigh in with their predictions on the Fed's actions, and what they'll mean for commercial real estate going forward.
"The Federal Reserve is running out of accommodative tools and many of the past efforts to stimulate the economy have been less than successful for a wide variety of reasons. Conceptually, raising interest rates provides the Fed with protection against runaway inflation, while at the same time recognizing the fundamental strength of the economy can benefit from increasing interest rates. Oddly enough, the economy is doing fine, while still in a post-war trough and I do expect that trend will continue—nominal growth supported by lower unemployment claims and steadily improving employment.
"In line with that forecast, there will likely be two rate increases this year of 25 bps each, one before June and one in October. Wall Street has already concluded that there might be three increases based on past Federal policy but I believe that is unlikely. Acceleration of rent increases will not benefit the economy and may cause declining investment that would reduce employment in key sectors."
"As fate would have it, a blog post on this very topic from NGKF CEO Barry Gosin just landed in my inbox. Barry says, 'With political and economic turmoil everywhere, the Fed should just relax. The banks are pricing in a higher-risk premium and there is less liquidity in the system already. I suggest Janet Yellen should take a nice vacation to Mexico and drink a few piña coladas.' Thanks, Barry. Let me add that after the glow from the piña coladas wears off, I think Janet and her band of merry bankers will raise rates one more time in the second half of the year."
"Based on the current state of the economy we expect one .25% rate hike this year, two at best. We do not foresee the Fed raising rates at the March meeting. While we remain optimistic that the job market will hold strong and consumption, GDP and other macro indicators will stay positive, until oil prices start to accelerate and climb above $40/barrel, inflation will remain muted. Without any signs of inflation, the Fed has no pressure on them to do anything. That being said, we do not anticipate the Fed following Japan or Sweden’s policy of negative interest rates. Still, these are odd times indeed."
"Anticipating the FED’s next move is important to bond/security traders, but less so to CRE investors. For the latter, the interest rate of importance is the long-term rate(s), and this morning the 10-year Treasury is just above 1.7% and lower than it was when the Fed initiated its first hike.
Interest rate observers will realize over this year that the excess global supply of capital is driving the long-term interest rate market, not central banks."
"We currently anticipate three rate increases during 2016 with the Federal funds rate reaching 1% by year end. As always, the Fed’s decisions will be data driven. The economic data has been a bit choppy early in 2016 and—when added to the increased volatility in financial markets—has probably taken an increase in March off the table. But, assuming the financial markets stabilize, a rate increase in the second quarter appears likely.
"With the unemployment rate below 5% and core inflation moving higher the Fed will want to tap on the brakes a bit more. We expect two more increases during the second half of the year as the economy continues to generate healthy job growth leading to higher wages and increasing inflationary pressure.
"It’s important to note that this does not mean the environment will be changing dramatically. Even if the Fed funds rate gets to 1%, it will still be well below historical levels, to say nothing of inflation, and generally supportive of economic growth. In addition, as we have seen over the past two months, an increase in the Fed funds rate does not necessarily lead to higher long-term rates.
"The 10-Year Treasury rate is lower today than it was when the Fed funds rate was increased in December. Longer-term interest rates are influenced by a wide range of factors, including global developments. Thus, even though the general trend is likely to be toward higher interest rates, overall rates will be low by historical standards and supportive of commercial real estate markets."
"The Federal Reserve, as part of its monetary policy objectives established by Congress—maximizing employment, stabilizing prices and moderating long-term interest rates—targets an unemployment rate of less than 6% and price inflation of around 2%. The unemployment rate dropped to 5% in 2015, indicating a strengthening job market and a major reason for the Fed’s decision to increase the funds rate in December of last year. Prices, as measured by the Consumer Price Index, remained relatively level during 2015, with little upward pressure. In light of deteriorating global economic conditions—negative interest rates at the European Central Bank and the Bank of Japan—coupled with increased volatility in financial markets, the Fed is likely to moderate the frequency of rate hikes. As such, we could see another one and likely no more than two rate increases during 2016."
"I think the strength of the dollar is having a bigger impact on the US economy than we expected. With other Central Banks around the world in full monetary expansion mode there have to be some doubts now as to how easily the Fed can go it alone. So I would expect to see the Fed moderate its language and hold off on interest rate rises until the second half. The slowdown in US manufacturing will give the Fed some public relations cover. This said, US consumers are in good health so rate rises, maybe two more this year, are still on the cards."
