Interest Rate Cuts By The Federal Reserve Undercuts Inflation Fight

Doug Marshall
Market Assessment
Published June 3, 2008

The Federal Reserve has responded to the slowing economy by cutting the Federal Funds rate over the last several months. Has this produced the desired effect of spurring on the economy?

Analysts are saying it is having the opposite effect. It’s made things worse because inflation, according to the Consumer Price Index, has been zooming upwards in recent months. Inflation is expected to rise to 5.2% over the next year, a rate that hasn’t been seen since the late Carter and early Reagan administrations.

The Fed’s monetary policy has created real negative interest rates, where short term interest rates are below current inflation rates. The Fed hopes weak growth will cool inflation, yet it remains to be seen how long the Fed can maintain its present monetary policy without occasioning a spike in long-term inflation.

The Fed is belatedly realizing that it has helped turn smoldering inflation into a five-alarm fire, burning out of control. Consequently, they have signaled that they’re ready to abandon their policy of rate cuts.

Though short-term rates have come down in reaction to those early rate cuts, even those rates are looking to increase soon. One analyst (Mike Larson, http://www.moneyandmarkets.com/) feels that we’re more likely to see the Fed raising rates in the near future.

So what does that mean for your clients who need financing on their commercial properties?

1. The days of low interest rate loans are over. Ten years from now we will look back at 2006 and the first half of 2007 and realize just how good we had it.
2. You should be encouraging your clients to lock in rates as soon as possible, for as long a term as possible.

Sources:
Wells Fargo Commercial Mortgage Update, May 27, 2008
Mike Larson, www.moneyandmarkets.com, May 27, 2008