What Happens when the Fed Hikes Rates


Several years ago, the economy was a disaster. Ben Bernanke, Hank Pauslon, and countless others ignored the very issues that sank us in the first place. The labor market was abysmal. Consumer spending was low.

The economic outlook was miserable.

Consumers were cutting back. Markets were sinking.

The only thing that saved us was a well-timed bailout by the Federal Reserve, as the Dow Jones sank to less than 6,600.

But after years of zero interest rates, the Fed is ready to take action.

Unfortunately, there’s a great deal of risk to raising interest rates too soon, or too fast. One, inflation is still under the 2% target. Two, wages are still less than what they were at the time of the financial chaos.

And consumers still aren’t coming back to the table. In fact, just weeks after the Wal-Mart bombshell, retail sales still aren’t so hot.

Sadly, poor retail sales are being blamed on warm weather.  We can't make that up.  What's next?  Thanksgiving got in the way of sales, too?

But I digress...

As we all know, when rates rise, the question of pricing stability in commercial real estate pop up. For example, Eric Rosengren, the president of the Boston Fed is now greatly worried about the rapid rise in commercial real estate.

“With rates so low, the risk is that investors seeking a higher return could be taking on too much risk in order to improve returns, not fully prepared for the day that interest rates move higher,” as noted by Market Watch.

“When the number of cranes observed on a short walk in a city such as Boston reaches double digits, as is the case today, it is worth reflecting on the sustainability of such growth,” Rosengren says. “Particularly given the role that commercial real estate played in the economic downturn in New England during the late 1980s, the trend in commercial real estate prices should be thoughtfully monitored.”

But as I’ve long said, we’re far from frothy bubble-like conditions in commercial real estate. With a great deal of capital inflow likely from domestic and foreign investors, which we’ve long talked about, I don’t believe we need to concern ourselves with Fed fears of another bubble.

It’ll also take a great deal of time before rising interest rates have a great impact on commercial real estate. A quarter point raise isn’t much.