Two Reasons the Time Is Right for the FED to Raise Rates

Regardless of the standards with which any analyst evaluates the strength of the US economy, we’re at a time when we can all agree that the US economy is making strides forward. What would surely differ, based on each analyst’s evaluation method, is the rate of growth.

Even consumers are more optimistic about the US economy, with the Conference Board recently signaling that consumer confidence rose to 101.1 in August, up from the revised 96.7 in July. In addition to the fact that the latest consumer confidence data betters consensus analyst expectation of 97 for August, it’s also the highest consumer sentiment seen since September 2015.

With such optimism coupled with strong core economic indicators, the question of if the economy is strong enough to support a rate hike is intensifying. The answer is: Yes, the economy is strong enough to handle a rate hike. In fact, a failure to raise benchmark rate soon could be the beginning of another big economic issues. Here are three signs that it’s time for a rate hike.

Rising Commercial Properties Prices

Before the last financial crisis, the US commercial property price index (CPPI), provided by Green Street Advisors, peaked at 100 in July 2007. By April 2009, the index had fallen to a low of 61.2. For the record, the Green Street commercial property price index is regarded as one of the three top CPPIs – along with Moody’s/RCA all-property composite index and Commercial Repeat Sale Indices from CoStar.

As the chart shows, the index has been on a rise since its April 2009 low of 61.2 – and is now even well above its pre-recession peak. To quantify things, based on the latest figure of 125.5 from Green Advisors, the index has risen 25.5% above the pre-recession peak. Earlier in the year, researchers at Morgan Stanley said commercial real estate prices were 18% above 2007 peak. This gives credence to Green Advisors’ data.

Here’re a big reason why the prices here are rising. The low interest rate environment has sent the more conservative bond investors into the more-reliable-than-equities real estate market, where the yields are higher, according to Morton Finance. And the low cost of borrowing is one of a good reason why the yield in the commercial real estate market is coveted.

With rates still relatively low, CPPIs are bound to keep rising. If rates remain low for an extended period, there’s a risk of unprecedented demand forming a bubble in the commercial real estate price. And as with any kind of bubble, it’ll end up bursting. This puts forward a case for why the Fed needs to tighten its monetary policy sometimes soon.

Rising Consumer Spending

The narrative about consumer spending is that it has always been on the rise – except during recessions when it drops, and logically so. However, it’s important to check the rate at which it is rising as it plays in determining at the rate of inflation. That is because rising consumer demand could starve supplies, hence leading to inflation.

Over the last one year, inflation has risen from 0.20%, at the beginning of September 2015, to 0.84% at present, according to data provided by YCharts. This signals that consumer spending has been rising at a high rate. In fact, the consumer spending growth in July made it fourth consecutive month consumer spending would be rising.

Moreover, you want to note that at some point, earlier in the year, the inflation rate had risen to about 1.38%.

Of course, this is still well below the Federal Reserve’s 2% target. However, couple the rising inflation here with other signs — like the commercial property prices discussed above – and it makes sense for the Fed to raise rates soon.