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Fundamentally Speaking: Federal Reserve Policy Unlikely to Change Soon

05/22/2013 | By Allen Kenney

In the latest edition of “Fundamentally Speaking,” Calvin Schnure, NAREIT’s vice president of research and industry information, discussed the Federal Reserve’s monetary policy.

“The Fed has been in the news an awful lot, frankly, because the economy is a lot stronger than what people had expected,” Schnure said.

Schnure noted that members of the Federal Open Market Committee have spoken out against the level of “policy accommodation” given to the national economy in the form of low interest rates and bond purchases. He said the thinking among critics is that the need for such stimulus measures has decreased since they were implemented.

“It’s actually very appropriate: The economy is stronger, so they should start talking about taking away some of what they’re doing,” Schnure said.

Schnure pointed out, however, the economy hasn’t yet reached the point of full recovery.

“We need to see even more strength to get back to full employment and a good strong economy to get where we need to go,” said Schnure, citing the national unemployment rate of 7.5 percent. The Fed has indicated that it would investigate policy changes once the unemployment rate reaches 6.5 percent.

Schnure also said expectations are that inflation should remain “well-contained.”

Overall, Schnure advised not to expect significant policy changes in the near future.

Schnure also discussed the interest-rate outlook once policy does change.

“The real key here is going to be [the Fed’s] communication policy,” Schnure said. “We’re in a completely different environment for central-banking communications now than we were before the 1990s. Then, it was a surprise—nobody knew what was going to happen. There was no deliberation. Right now, they publish the forecasts. They talk about what’s on their radar screen.”

When the Fed does decide to revise monetary policy, the implementation could be relatively slow, according to Schnure.

“They’re also likely to start fairly early, perhaps gradually tapering off their purchases of bonds, Treasurys and mortgage-backed securities before ending those,” he said. “Then, sometime later, they will begin raising interest rates, so that’s going to help make for a smooth transition. The other important factor is that, right now, markets are flush with cash. People are looking for places to put that cash.”