Economy Watch: When Will Interest Rates Rise?

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The monetary policy question of the year is: When are interest rates, so low now, going to be a little higher? At the beginning of the year, the conventional wisdom on the question was “soon”. Maybe in the spring, maybe in the summer, but the economy seemed recovered enough to take a small dose of higher interest rates. Now, barely into spring, the outlook is muddied. An answer to the question of timing is even less certain, as not even members of the Federal Reserve have reached a consensus on the question, as evidenced by the central bank’s most recent meeting minutes, which were released on Wednesday.

To quote the minutes, which are in Fed-speak, but clearly revealing more than usual: “Participants expressed a range of views about how they would assess… when they might deem it appropriate to begin removing policy accommodation…” Range of views means: no consensus, and maybe even a spirited argument (it’s fun to think that, anyway). Some committee members still want higher rates sooner rather than later: “Several participants judged that the economic data and outlook were likely to warrant beginning normalization at the June meeting.” Not everyone thinks so: “However, others anticipated that the effects of energy price declines and the dollar’s appreciation would continue to weigh on inflation in the near term, suggesting that conditions likely would not be appropriate to begin raising rates until later in the year, and a couple of participants suggested that the economic outlook likely would not call for liftoff until 2016.”

Complicating things lately are the most recent mediocre jobs report—which came out after the FOMC meeting described in the meeting, which was in mid-March—but also crummy wage growth and GDP growth in the first quarter that wasn’t particularly robust. The Fed doesn’t really know why inflation remains so stubbornly below the central bank’s 2 percent, which is a sticking point against raising rates. The minutes also noted that “many participants commented that it would be desirable to provide additional information to the public about the Committee’s strategy for policy after the beginning of normalization.” That is, the Fed might warn the country till its blue in the face about a pending interest rate increase, but investors and business owners might still panic when it happens.

Uncertainty of this kind isn’t a particularly a good thing for the economy or the health of real estate markets; but on the other hand, low interest rates are a continuing lubricant for deals. The betting money is that rates will not go up this summer, which gives developers and investors a bit more time to get things done at the lower rates. When they do come, higher rates won’t be a catastrophe (everyone will get used to them soon enough), but they might still be a bump that slows deal making down for a while.

Source: MultiHousingNews