NEW YORK CITY—Two central banks, two different directions in monetary policy. That was the study in contrasts observed by Ken McCarthy, Cushman & Wakefield‘s senior managing director for economic analysis & forecasting, following presentations last week by Federal Reserve Chair Janet Yellen and Mario Draghi, president of the European Central Bank. The bottom result, McCarthy writes: “Interest rates are expected to rise this year in the US as the recovery gains momentum and are likely to decline in continental Europe as the need for stimulus remains and inflation continues to decline.”
Yellen accentuated the positive in her testimony before Congress’ Joint Economic Committee last Wednesday. “I expect that economic activity will expand at a somewhat faster pace this year than it did last year,” she testified, and although Yellen cited forces leading to uncertainty as well as tailwinds, her overall assessment, McCarthy wrote, was that “growth will be healthy enough for the Federal Reserve to continue steadily reducing its purchases of securities over the next several months.”
At this point, McCarthy writes, “”The economy is able to stand on its own two feet without Fed support and, to extend the analogy, will soon be walking and possibly running. But there is still enough worry about slack in the system that there is no need to raise interest rates any time soon.” The best guess at present is for the to begin raising rates “about a year from now. The key point is the Fed’s monetary policy direction is to gradually shift from stimulus to restraint,” with an improving economy the key driver of this ongoing policy shift.
Across the pond, a very different viewpoint was offered by Draghi in response to questions on ECB policy. “We will maintain a high degree of monetary accommodation and act swiftly, if required, with further policy easing,” he commented. During the Q&A, McCarthy wrote, “Draghi virtually assured the world that the ECB will lower interest rates in June when he said, ‘I would say that the Governing Council is comfortable with acting next time…’ His presentation highlighted the slack in the euro zone economy and that the risks are greater that the region will weaken rather than strengthen. He emphasized that the regional economy continues to grow, but not fast enough to boost inflation.”
When it comes to implications for the commercial real estate sector here and in Europe, writes McCarthy, “these different outlooks and policy approaches indicate that value drivers will be very different.” In the US, returns will be driven by “improving fundamentals as stronger economic growth, in an environment with little new construction deliveries, pushes vacancy lower and places upward pressure on rents. Interest rates are expected to rise in the U.S. during the balance of 2014.” In the euro zone, meanwhile, “a combination of more attractive pricing and low financing rates will be the main forces enabling investors to obtain attractive returns. Interest rates are most likely to fall, making financing more attractive to those who can obtain it and enhancing returns even in a sluggish market.” They’ll stay low in Europe through next year, he adds.