The recent spate of negative economic news is motivating downward adjustments in the near-term growth outlook for the US economy, both in the private sector and amongst policymakers. In contrast with the positive revisions that followed the extension of tax cuts and expectations that higher net incomes would give the economy a bump in early 2011, the most current data show that the expansion slowed in the first quarter. The Bureau of Economic Analysis’ revised estimate, released on May 26, shows real annualized growth of 1.8 percent in Q1’11, down from 3.1 percent in Q4’10 (see my May 2 analysis of the preliminary report, Economic Recovery Slows in First Quarter). Consensus forecasts put GDP growth for 2011 at 2.6 percent, consistent with only modest improvements in the pace of payroll gains through the end of the year.

Concerns about the lackluster pace of the domestic recovery and spillovers from disruptions to growth in Japan, the Euro Zone, and the Middle East, coincide with the planned conclusion of the Federal Reserve's second quantitative easing (QE2) program this month. As a result, questions about the efficacy of this unorthodox policy intervention are receiving new attention. Should we extend the Fed's purchases of Treasury securities? And if so, what are the attendant risks of growing the central bank’s balance sheet even further?

The question is material for the commercial real estate markets. Inordinately low interest rates have been crucial to the current recovery in prices, credit availability, and the management of distress. In many instances, the artificial suppression of risk-free rates has fomented greater risk-taking by investors, supporting the (artificial) inflation of asset prices. Will the end of QE2 derail us from this trajectory? Given the myriad forces driving interest rates, it is unlikely that the end of QE2 will result in an abrupt rise in rates. That being said, rates must trend upward over time – all else equal – if demand for Treasuries abates without a corresponding downward adjustment in issuance.

As it stands, the Federal Reserve has indicated that it will wind down QE2 on the program's original timeframe. A shift in that policy is unlikely. The financial and political winds are against such a move. Even within the Fed, there are extant divisions amongst the FOMC’s voting members that make a new round unpalatable. A reversal of the clearly stated commitment to end QE2 in June also risks undercutting the Fed’s credibility within global financial markets.

We should not bemoan QE2’s end upon its sunset. The low inflation concerns that were amongst the motivations for the initial program are not currently in evidence. Rather, further bond-buying will increase the risk of unwanted inflation once the slack in the economy is absorbed. Policymakers are also mindful that the larger the Fed’s balance sheet grows now, the greater the extent of tightening down the road. As for the potential for higher interest rates, that is a knock our market must take in its course. Market manipulations cannot persist indefinitely; the longer they endure, the greater the impairment of efficient price discovery. While there may have been a role for interventions in support of asset price stability during the most difficult phases of the financial crisis, major markets' current property price trajectory suggests that accomodative monetary policy is now overly impactful and is distorting investor behavior to the market’s long-term disadvantage.