November 24, 2020
Former Fed Chair Says More Stimulus Needed for Recovery Former Federal Reserve Chairman Ben Bernanke says the U.S. economy will see a “very slow and painful recovery” in the next six to eight months, and more federal stimulus will be required to fully rebound from the COVID-19 recession. Bernanke was interviewed by Hessam Nadji, President and CEO of Marcus & Millichap, and Robert Hart, President & CEO of TruAmerica Multifamily, on November 18 about his outlook for the economy, political landscape and commercial real estate.
“We are all very hopeful the vaccines are going to make a big difference but that’s not going to be really effective until well into next year,” Bernanke said, noting that the economy has lost 10 million jobs on a net basis, up from 22 million lost in April and May. “People have gone back to work in manufacturing, in housing; those of us lucky enough to work from home are doing that now. But the service industries – restaurants, brick and mortar retail, personal services -- are still operating at low levels and it is going to take a while to get people back to work.”
‘There will be some effects in composition, but overall if economy comes back and grows as we expect, that will be good for commercial real estate.’ –Former Federal Reserve Chairman Ben Bernanke
Some optimistic signs include a bounce back in core retail sales, the stock market rally, a rise in the number of small business start-ups, and growth in the savings rate. “There appears to be significant pent-up demand as the savings rate has gone up, so there is a potential future release of pent-up demand,” he said.
State and Local Governments At Risk
The Federal Reserve’s initial response to the COVID-19 crisis was powerful, Bernanke noted, including the purchase of Treasuries and mortgage-backed securities, new credit facilities, and a cut in interest rates to nearly zero. As a result, interest-sensitive sectors such as housing, capital investment and consumer durables have outperformed and are likely to lead the economy out of recession, he said.
The $2 trillion CARES Act was also effective, Bernanke said, noting that in June the Fed predicted unemployment would be more than 9 percent by year-end, while it is currently below 7 percent.
But more fiscal stimulus is needed to help workers at the bottom who have suffered most in the pandemic. “Without that support for families, for small businesses, and importantly for state and local governments which are particularly hard hit, that’s going to be a negative factor going forward,” he said.
During the Great Financial Crisis, state and local governments cut back on employment and services because of their balanced budget rules. “That was a big negative shock that offset part of the benefits of the federal programs,” he said.
Tax and Political Outlook
On the political front, the industry is concerned about potential corporate tax increases and higher personal taxes proposed by President-elect Biden. But Bernanke suggested these aren’t likely to pass if Republicans maintain control of the Senate, and even if measures are approved, they won’t have a significant impact on recovery.
“The decline from 35 to 21 percent did not have as big an effect on capital investment or wages as was promised, and a small or partial reversal would probably not have a major impact,” he explained. “In terms of personal taxes, the Democrats are focusing at the very upper end. I think at least in the short run that these are the folks who are most likely to save and least likely to spend their extra dollar. So I think the direct impact on the recovery would be moderate.”
Bernanke expects Congress to approve some kind of stimulus package and possibly fund infrastructure investment in airports, roads, and bridges, something that both side of the aisles have been able to agree on historically. “We could improve productivity, create jobs and improve the economy in general by doing more of that,” he said. But a large fiscal program that includes major changes to health care, education and climate change policy are going to be much tougher to achieve if Republicans retain control of the Senate, he added.
Interest Rate Forecast
With the Federal Reserve adopting a new framework known as “flexible average inflation targeting,” investors can expect to see interest rates remain low for some time, Bernanke said. Under this method, if inflation falls below the 2 percent target, the Fed doesn’t just attempt to get back to 2 percent, it overshoots the target for a time to compensate.
“That’s basically a way of telling the markets the Fed is going to be lower for longer in order to get inflation up and above 2 percent target,” he said. “And secondly, the Fed cares very much about inflation expectations – it wants the markets and the public to think about inflation being stable around 2 percent.” In addition, the Fed is more focused on the goal of full employment.
Some observers are concerned about the rising U.S. debt, which has surged to levels not seen since the end of World War II. But Bernanke called the pandemic recession “a temporary emergency” and said the government has room to take on debt to respond to the crisis, especially given low interest rates.
The CRE Environment
Low interest rates will be “a powerful factor” boosting commercial real estate, along with fundamentals as businesses recover and need space, though the effects of the virus will linger. “People’s habits will have changed – they may be more inclined to order online, to work from home – so those will have some persistent effects on certain types of real estate,” he said, noting that senior centers might suffer while warehouses benefit. “There will be some effects in composition, but overall if economy comes back and grows as we expect, that will be good for commercial real estate.”
As for commercial mortgage delinquencies, the Fed can continue to buy commercial mortgage-backed securities to prop up the market but can’t directly assist companies or individuals. “The source of help is going to have to be the federal government in the near-term,” Bernanke said. “We’ll have to see how effectively fiscal policy can provide the necessary support. We don’t have the same kinds of financial issues or disruptions that led to the very slow recovery from the Great Recession. I think it will be faster than that. The next six months are going to be very important.”
Navigating the shifting economic and political environment calls for thoughtful strategy. Please reach out to an MMCC Capital Advisor for custom guidance, access to an unparalleled network of lenders, and the broadest range of capital solutions. We at Marcus & Millichap Capital Corporation wish you a safe and happy Thanksgiving.INDEX RATES
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