A risk exists that the Federal Reserve “may have gone too far” with rapid interest rate increases over the past 14 months or so “and won’t know until they’ve gone farther,” Mary Ludgin, senior managing director and head of global research at Heitman, said Tuesday during the latest online Leadership Huddle presented by the National Investment Center for Seniors Housing & Care.
NIC Chief Economist Beth Burnham Mace moderated the discussion.
The Fed “held rates basically at zero long past when many would have begun the process of tightening, and then they’ve lurched to the other extreme,” Ludgin said. “So, it’s a little unclear as to what their next move will be once they consider that inflation has been brought to the right level.”
The effect of the Fed’s actions could lead to a replay of the global financial crisis of 2008, she opined.
“The rapid increases in interest rates are putting us at risk. They needed to be done,” Ludgin said. “Inflation was too high, but the risk is that the Fed pushes a little too far and into a recession.”
At the same time, she said, “The global financial crisis was the granddaddy of recessions of our lifetime. We’re not going to see something similar to that.”
Rick Brace, director at AEW Capital Management, said that the Fed is interested in an “elevated risk of recession” by intentionally slowing the pace of inflation.
“So some of it is just built into the natural design of what their objective is,” Brace said.
Typically, he said, a “delayed dynamic” occurs after the Fed pauses and before a recession kicks in. He speculated that the United States might see a recession early next year.
Some economists speculate that the Fed may skip raising the interest rates in July.
“If we looked at the numbers [Monday], market settlement was 79% chance of a skip,” Brace said. After the [consumer price index] came out [Tuesday], it was 94%.”
According to the Bureau of Labor Statistics, the CPI increased at a 4% annual pace in May. That is the lowest reading in more than two years. It is down from April’s 4.9% gain, not close enough to the 2% benchmark the Federal Reserve would like to see.
Both Ludgin and Brace said that they are encouraging clients to be patient when it comes to investing, but they said there is reason to be optimistic.
“Real estate is a pretty good bet,” Ludgin said. “With stress brings opportunity,” Brace said.
It is important to watch that the cost of capital doesn’t fall quickly, Brace added.
“It’s going to be difficult for those interest rates to drop back down to zero really quickly. That allows people to blend and extend. …We’re just watching to see what the dynamic is this go-around for those pressures and will there be a little more distress this go-around versus last time on the commercial side because of those dynamics,” he said.
