Interest Rate Liftoff, Sooner or Later?

Predicting what the Federal Reserve’s going to do about interest rates is something of a mug’s game, since the central bank goes out of its way to be opaque about policy matters.

Predicting what the Federal Reserve’s going to do about interest rates is something of a mug’s game, since the central bank goes out of its way to be opaque about policy matters. Still, so much rides on the exact number that predicting – guessing – when rates will change is a cottage industry among economists, journalists and other interested parties. That includes CRE developers, investors, and lenders, whose deals sometimes depend on interest-rate stability (or simple low rates; it’s easy to love low rates).

In their various speeches Members of the Federal Open Market Committee offer their views, but never promises, about the future course of monetary policy.  On Monday, Atlanta Fed president Dennis Lockhart spoke before the Rotary Club of Atlanta, characterizing the U.S. economy as “hitting on all cylinders… We are getting closer to a point where we can begin a process of normalizing the interest-rate environment. That process will begin with so-called ‘liftoff’— that is, the first increase in the policy rate.” The question that naturally follows that kind of statement is, Yes, but when?

“I think the momentum evident in the second half of 2014 will carry over into 2015, and the ongoing outlook will remain solid,” Lockhart said. “If that is indeed the case, I believe the first action to raise interest rates will in all likelihood be justified by the middle of the year. The phrase ‘middle of the year’ is admittedly not very precise. That’s purposeful on my part…” Interestingly, Lockhart’s considered one of the 2015 FOMC’s “doves” – that is, willing to wait longer than a “hawk” to raise rates (though the terms are subjective, Deutsche Bank ranks FOMC members from 1 to 5 on a dove-hawk scale; Lockhart gets a dovish 1). Another caveat that should be noted: at the beginning of the speech, the head of the Atlanta Fed stressed that he isn’t speaking for the FOMC or even the Atlanta Fed, but for himself. “My colleagues may not agree with what I have to say,” he noted wryly.

Indeed, Chicago Fed president Charles Evans, who’s also a member of FOMC and also a dove (1 on the Deutsche Bank scale), said on Friday on CNBC’s “Squawk Box” that he’s OK with waiting until 2016 before the liftoff. Though the job outlook is a lot better now, he fretted about the singular lack of inflation in the economy, which is below the Fed’s target of 2 percent. What would bring the rate upward? Upward wage pressures, Evans said. So far the job recovery’s been good, but not the wage recovery, and he’s willing to wait for that to happen before liftoff. “It’s one of the dilemmas we’re facing,” the Chicago Fed head said. “And that’s why I’m in favor of being patient on raising interest rates.”

So not even the Fed doves agree on when rates will go up. In the meantime, anecdotal evidence in the different commercial property sectors suggest that deal velocity is up as the near year grinds on, to lock in low rates the likes of which might go away sometime this year.

Wall Street continued on its negative track on Monday. The Dow Jones Industrial Average was down 96.53 points, or 0.54 percent, while the S&P 500 lost 0.81 percent and the Nasdaq declined 0.84 percent. Once again, REITs bucked the tide: The Dow Jones U.S. Select REIT Index gained 0.81 percent on Friday.