Report | Economic insight for October 4, 2017
A combination of tame inflation, income, and spending data in August just added to the confusion of those who were surprised by how strongly the Fed adhered to its intention to raise rates yet again in 2017. Clearly, the Fed wants to be ahead of inflation but any later increase remains uncertain. While we believe that the economy can and should sustain higher rates, simply based on the data alone it appears that the Fed is not wholly sticking to its guidance. For commercial real estate, if interest rates are rising faster than inflation, that potentially undermines the asset class' ability to hedge inflation for properties with leases longer than one year. If rates used to discount cash flows are rising more quickly than the cash flows themselves, the inflation hedge will only work partially.
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