by Doug Marshall, CCIM
Market Assessment
Published September 30, 2009

And the hits just keep onnnnn comin’!

After having committed earlier this year to a policy of artificial stimulus of the mortgage market, the Fed made the announcement on September 23rd that they were withdrawing – or at least not expanding – direct purchases of mortgages and government debt.

Most “experts” believe this decision to stop buying mortgages and government debt will have a dramatic long-term impact on interest rates.

Shown below are the opinions by knowledgeable sources about this monumental decision that we find most provocative:

· With the amount of money the Federal government has pumped into the economy, almost every economist is predicting the return of hyper-inflation. The Federal Reserve’s only remedy for that will be to raise interest rates which, as we all know, is counter to business development and growth. 1

Surprisingly, I have also seen this premise directly contradicted, including this one by the Fed: “the Committee expects that inflation will remain subdued for some time.”

Another humdinger of a quote regarding the recent Fed decision:

· These purchases helped the Federal government continue its stimulative deficit spending over the cries of budget hawks in Congress, it helped keep a lid on borrowing rates throughout the economy.

Thus, we had a unique situation where stocks were rising without a concurrent and ultimately self-defeating rise in Treasury yields – enjoying a daily slice of chocolate cheesecake without an expansion in the waistline.

Now the equity market must operate in a more normal environment where rising stock prices result in higher interest rates. 2

The Federal Open Market Committee, which made this decision and other decisions affecting monetary policy, seems itself to be at odds as to what inflation is going to do, how much slack is in the economy, and how much intervention is necessary or healthy.

While it’s disappointing to see the Fed’s purchases of mortgages and government debt being discontinued, surely commercial real estate is going to require a return to more realistic – if painful – conditions in order to right itself well.

Perhaps not quickly, but well. PriceWaterhouseCooper, for one, is forecasting that the commercial real estate market will remain in recession until at least 2012. 3

It’s the byword of capitalism: survival of the fittest. And, while the fittest are surviving, look for more vacant storefronts and a shorter lender list, as the lions have their way with the lambs.

Sources:
1 Commercial Real Estate Will Not Benefit From The End Of The Current Recession, by Robert Canter of Gerson Lehman Group, Sept 8 2009
2 Did The Fed Just Kill The Bull Market? by Anthony Mirhaydan of Top Stocks Blog – MSN Money, Sep 23 2009
3 Commercial Real Estate Recession to Keep Going, by SquareFeetBlog.com, Sep 15 2009