I had a 50/50 chance of being right last month when I predicted that the Fed would err on the side of caution at their September FOMC meeting and keep rates at current near-zero levels. I was right and, let me be the first to admit – it was pure dumb luck! They could just as easily have moved rates up a notch. Lots of people who know a heck of a lot more about all of this than I do believed very strongly that they would do just that. They were wrong this time – but they won't be wrong forever.
Now we get to play this game again. There are two more FOMC meetings this year – Oct. 27-28 and Dec. 15-16. Once again, opinions are divided as to what the Fed will do. Fed Chair Janet Yellen has been dropping hints for some time that the Fed needs to begin to raise rates in the face of an improving economy and lower unemployment. But recent economic trends, both here and abroad, have made that argument less compelling, and seemingly less pressing. China's stock market swoon in August derailed any rate increase at last month's FOMC meeting. And now the September jobs report data released last Friday (October 2) looks like it might have the same effect when the FOMC meets again later this month.
Despite predictions of another 200,000 +/- new jobs last month, the actual September report came in at a much weaker (but still positive) 142,000. The report also revised downward the job totals for July and August, with 22,000 fewer jobs in July and 37,000 fewer jobs in August than previously estimated.
About the only good news in the report was that the unemployment rate held steady at 5.1%. But even here, there were some unsettling undercurrents, including yet another decline in the percentage of the total adult population participating in the workforce. The labor force participation rate has fallen steadily since the recession hit, and has continued to fall even as the overall economy seems to have rebounded in recent years. Last month's participation rate fell again, to 62.4%, down 0.2% from the month before, the lowest it has been since October 1977.
Let's remember – the reason the Fed would increase interest rates would be to keep inflation in check and prevent the economy from overheating. Despite years of near zero percent short-term interest rates, it is still difficult for the Fed to convincingly demonstrate that the economy is at risk of overheating, or that inflation is showing signs of flaring up. If anything, the sharp declines in commodity prices over the past few years (crude oil is the poster-child, but lower prices are the norm across a broad range of commodities) suggest that deflation might actually be a bigger concern.
Anyway, all of this means that we are once again looking at a nail-biter in October. Most of the analysts are saying no rate increase is likely in October. I'm going to go out on a limb and predict that the Fed will change course and raise rates by some very nominal amount, just to get something done before the end of the calendar year. But if we see another big drop in the stock market, or some other major disruption at home or abroad, all bets are off.
So, what does this mean for the RPBG apartment investor? Well, it means that the refinance bonanza continues. If you have refinanced your properties anytime over the past several years, you are doubtless happier than not with the interest rates you were able to obtain. Right now, it looks like that party is not yet over. There's always a silver lining to every dark cloud. Right now, the low rate environment is it. Enjoy it while it lasts; although it's been going on for a long time, remember – it won't last forever!
Steve Cain, RPBG Director