Publisher’s Notes: Fed Secrets

Notes from Publisher Jack Kern.

Jack KernI’m happy to share some thoughts with you in this column. It’s been a pleasure to get to know many of you at industry conferences and frequently the conversation turns to one of my favorite topics, interest rates. Now I know for many of you this is a total yawn and I can tell why I’m not invited to many dinners or events because I’m the dull guy in the corner. I can tell you however that there is one group that seems to appreciate a lot of what I have to say. I’m frequently contributing background and information to the Federal Reserve. I usually receive a request for my viewpoint with a number of focus questions and occasionally there is the opportunity to just share whatever I believe the Fed Chiefs need to know. Since I’m an avid reader of the notes from the meetings of the Federal Open Market Committee, I try to gauge the sentiment and viewpoint of a lot of the Fed’s officers. For me, having the privilege to pass along my thoughts is something I take very seriously. Occasionally I think about talking about how disappointed I am with one policy or another and commend others, while offering statistical evidence to support my position. They’ve never written back to me, but I can tell you that I get lots of questions, especially since I believe that commercial real estate activity is a leading indicator of how the economy is about to perform.

One key question is capacity utilization, business planning and likely loan activities. I’m an optimist generally (said to counter those who remember my dour predictions in 2006 and 2007) but I’m a realist too, meaning I take a position on rates, GDP and policy responses that hopefully support economic growth. Nothing happens in the economy until capital is deployed in some fashion and the current balance between interest rates and the risk of deflation looms large in many investors’ minds. A concerted effort by the Fed probably saved the economy and stopped massive losses at banks in 2007 because of the intervention that was put into place. Now many are wondering what role interest rates play in 2015 and how the Fed will respond at the next FOMC meeting. I have no direct information but I can suggest to you that the Fed won’t change much of anything at this point because the economy is attempting to crawl up the side of the mountain that is the burden of misguided Federal policy. My viewpoint and prediction on interest rates is cloudy with a chance of storms, but otherwise nothing to worry about as we see very gradually rising rates. Those with experience in many cycles in commercial real estate have seen this movie before and know that prudent investing will prevent any serious diminution in values. For a lot of the rest of you cowboys, sell the herd, saddle up and get out of town. Interest rates are a trigger and the long line of unintended consequences have never been more closely connected, or correlated. And you can tell the Fed I said so.

Jack Kern, Publisher and Research Editor