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Bay Area Research Rant: Fed on Ice… For Now

By Garrick Brown, Vice President of Research – West Region

FedIce-resized-600If you have been following me over the FedIcepast year or so, you probably know that I continue to harp on the rising cost of living in the Bay Area as being the greatest threat to economic growth that the region faces. This, of course, is the good economic problem to have. We all remember the bad economic problems of five years ago. Those did not include traffic jams and an overtaxed infrastructure. They did not include skyrocketing rents… or escalating food prices, or the difficulty of getting reservations at State Bird Provisions. And they certainly didn’t include the problem of keeping good talent on your staff or of wage growth. No, those problems were more of the “I can’t find a job” variety. So let’s start with a little balance in at least acknowledging what the problems were then and what they were now.

This last point is key simply because sadly we are entering into another political cycle and for the next 13.5 months we are going to see the usual games from our politicians that pop up every election year. It’s always more or less the same; if things are good, the party that is in power will try to take more credit than they deserve and the party that is not in power will try to paint things as worse than they are. If things are bad, the party in power will try to deflect away blame… even if their own policies played a significant role in mucking things up. And the party that is out of power will try to attribute more blame than is actually reasonable. It’s pretty much always been that way, although I certainly am not saying that all candidates lie to same degree or with the same skill. But election years are years where I really hate dealing with some of the questions I get when I give economic forecasts. They are often politically loaded and, as we all know, when it comes to politics and religion people believe what they want to believe. Humans sadly, simply don’t approach either with anything close to a scientific approach.

So get ready for a year ahead when the economic news is going to be increasingly politicized. That being said, the biggest news of the last week is that the Fed didn’t raise interest rates. I had predicted they wouldn’t, but that wasn’t really going out on a limb. I believe it is true that the Fed has shown a bias towards raising rates based on their statements and even some made this week I think prove my point. Yesterday, St. Louis Fed President James Bullard declared that October hikes still aren’t off the table. I definitely think they are a possibility and it would actually fall in with predictions I made back in Q1. However, in light of recent market volatility I still see it unlikely. The reason isn’t necessarily that they shouldn’t. I don’t think there will be a huge impact on the economy if they push rates up by a quarter of a percent. However, there is the likelihood of this spurring another round of Wall Street freakouts. And what it really comes down to is risk and reward. If the Fed increases rates next month and the market becomes volatile again, the question becomes how volatile? Sure, they could go back and lower rates at their next meeting, but then their credibility takes a massive hit and that hit may mean even more volatility. So there is a significant amount of risk if they move and they are a little early in the timing. But what happens if they wait? Probably not much, though they are concerned about the long-term danger of asset pricing becoming disconnected from underlying fundamentals. The longer that interest rates are near zero and helping to prop up activity, the greater the risk of this. But the economy still has not achieved many of their stated benchmarks. They have a target inflation rate of 2.0%, but inflation now and for the next few months is likely to remain at, or near, zero thanks to cheap oil. Meanwhile, with nearly every other Central Bank maintaining near zero interest rates (if not actually lowering them), this also remains a concern. So on a risk vs. reward scenario, it still remains highly unlikely that the Fed moves next month. A strong showing with holiday sales and I wouldn’t rule out a December hike but at this point the smart money bet is still early 2016.

This post is commentary from the latest weekly edition of our Bay Area Research Rant, which you can subscribe to for free by e-mailing garrick.brown@cushwake.com.

garrick-brownGarrick joined Cushman & Wakefield (formerly DTZ / Cassidy Turley) in October 2010. He serves as Vice President of Retail Research for the Americas. He speaks frequently at industry events and has been a keynote speaker at symposiums, conferences and market forecasting events for groups like the Appraisal Institute, Urban Land Institute, CREW, ICSC and PRSM. He is also a member of Lambda Alpha International, an invitation-only land use society for those who are involved in the ownership, management, regulation and conservation of land, but also those who are involved in its development, redevelopment and preservation.

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