Fed Taper's Impact on Businesses and Real Estate Investors

Fed Taper and Its Impact on Inflation and Mortgage-Backed Securities

It is impossible to read, watch, or listen to the news without someone mentioning inflation as the cause of, or the result of, whatever happens to be the big topic of the day. Additionally, the “Fed Taper” has made headlines in response to inflation.?But these terms are being used as shorthand for an audience that may not understand the inner machinations.

The pandemic caused the Fed to roll out plans for making financing more accessible to businesses.?The intent was to prevent a major economic downturn. With these programs winding down, it is time for the Federal Reserve to moderate the inflation these programs helped create.

Less accommodative monetary policy may negatively impact business owners, property investors, homeowners, tenants, and consumers. Fortunately, I feel there is light at the end of the tunnel, or at least alternatives to the higher requirements and interest rates that may come from traditional lending sources.

The Federal Reserve and Asset Purchases

Simply put, the Fed Taper is the process of winding down the number of assets purchased in a given period. Since the pandemic began in the United States, the Federal Reserve has been purchasing assets, such as Treasury bonds and mortgage-backed securities. This is a relatively new process that the Fed only adopted for unusual or emergency circumstances.

Asset purchases were first employed to mitigate the effects of the Great Recession in 2008.?The idea was to lower interest rates on borrowing for the short-term, making it easier for businesses to survive and potentially offset further economic downturns.

In 2020, we saw similar emergency measures in the form of Paycheck Protection Program (PPP) loans, which were granted with the potential for full forgiveness. Since businesses reduced their operations and workforce while commercial property investors juggled rent forgiveness programs, the Fed made these asset purchases to make liquidity readily available.??

Winding Down

From March 2020 to November 2021, the Federal Reserve purchased $4 trillion of mortgage-backed securities and assets, before announcing they would begin tapering these purchases.

While the Fed’s actions arguably provided a way forward for many businesses and commercial property owners, it also opened up the doors to inflation. While it may seem odd for the Fed to taper its asset purchases while the pandemic is still active, it may mitigate inflation before it gets worse and risk another economic downturn.

The Impact on Businesses and Commercial Real Estate

From 2009 to 2016, businesses and commercial real estate investors experienced record low interest rates. From 2017 to 2019, those rates rose in response to the rate hikes by the Federal Reserve. For the past two years, rates have once again been at rock-bottom levels.

With the Fed Taper, businesses have already started to experience higher interest rates. Commercial real estate investors and property developers have similarly started to see higher rates. This cost, of course, is passed onto consumers, homeowners, and tenants.

There is a bottleneck forming for businesses secure loans with low fixed rates before the Federal Reserve begins to hike rates. Some analysts are projecting that readily accessible funding will soon end, with alternative lending channels becoming more popular. ??Savvy entrepreneurs will seek out alternative financing solutions as a means for prohibitively high requirements from traditional lenders.

Looking to 2032

While 2032 may be a decade away, increasing interest rates may become the norm. As long as the pandemic goes away quickly and traditional lenders do not try to make up for lost time by raising rates and requirements for borrowers, the incremental hikes may be straining but manageable.

Capital infusions from the commercial finance sector and private lenders will most likely help businesses and property investors meet their goals by providing accessible solutions. After the events of the past two years, nobody can predict how external pressures will impact the economy, or what measures the Fed will take to mitigate inflation and potential downturns.?

Entrepreneurs and commercial real estate investors should plan accordingly and explore options to insulate themselves against inflation and rate hikes as asset purchases taper down this year.