Last week, the Federal Reserve surprised most market observers by choosing to continue their $85 billion per month bond-buying program (Quantitative Easing); thus continuing their commitment to reduce our national debt and improve our economic recovery. This action countered consensus expectations the Fed would begin tapering asset purchases to $70-75 billion per month.
While acknowledging steady, broad-based economic growth, the Fed’s statement cites lingering concerns about the effect of fiscal tightening, the depressed level of labor force participation, flat wage growth, and the impact of higher mortgage rates on the housing market recovery.
Fed’s Easing Policy – Seems to be Working for the Short Term
The Stock Markets are hitting highs that we have not seen for 10 years and the unemployement is down to 7.3%. Recent tax increases and federal budget cuts, including the sequester, the across-the-board cuts that took effect earlier this year, will reduct debt in the short-term, according to the CBO. The annual deficit will fall to 2% of GDP by 2015. And by 2018 federal debt held by the public will fall to 68% of GDP, down from 73% now.
Long Term – CBO Warns National Debt is On Unsustainable Path
The Congressional Budget Office said Tuesday the nation’s debt is on an unsustainable path and warned that by 2038 if current law continues federal debt held by the public would hit 100% of GDP.
The nonpartisan CBO added by the same time frame if no action by Congress is taken entitlement spending would increase to 14% of GDP, or twice the average over the last 40 years, and the annual deficit would grow to 6.5% GDP, bigger than any year between 1947 and 2008.
“The unsustainable nature of the federal government’s current tax and spending policies presents lawmakers and the public with difficult choices,” the CBO wrote in its latest report on the long-term budget outlook.
Despite the downgrade of its view on current economic conditions and lower expectations for the near-term outlook, the Fed’s decision to maintain the quantitative easing (QE) program rallied both equity and bond markets to high levels that we have not seen for many years.
Uncertainty – October is Always Interesting The Fed’s decision to maintain the status-quo does little to alleviate uncertainty in the economy. With a new Fed chief coming on board, Congress set to debate over the debt ceiling in less than two weeks, and renewed conjecture as to the start date of tapering, the capital markets will likely prove volatile through the end of the year.
Self Storage Markets
The continued easing by the Fed should keep interest rates down, which is a good thing if you are trying to get a new self storage loan (we remember a few years ago there was very little financing available). However, the battle ahead in Congress is going to be very important to all Americans. Lowering the Nation’s debt levels is sure to put pressure on all of us.
Marcus & Millichap Real Estate Investment Services