Inflation key to rate lift

Real estate is a pillar of Florida's economy, but it plays a lesser role in deciding Federal Reserve monetary policy.

Federal Reserve Bank of Atlanta President Dennis Lockhart said as much at a luncheon in Naples recently hosted by First Florida Integrity Bank. What Lockhart says is important because he is a voting member of the board's interest-rate setting Federal Open Market Committee.

Commercial real estate investors are particularly concerned that interest rate increases will boost rates of capitalization, which move inversely to property values. “That's a legitimate concern,” Lockhart acknowledged in a briefing after his speech.

Indeed, Bloomberg reported an index of 166 real estate investment trusts fell 2.8% on Feb. 6 after a better-than-expected jobs creation report, the biggest drop since September. The jobs data, which Lockhart called “quite encouraging,” boosted speculation that the Federal Reserve will boost short-term interest rates this summer.

But Lockhart cautioned employment and inflation are the two factors that will have the most sway on setting monetary policy. In particular, Lockhart says he's concerned that inflation is well below the Federal Reserve's target of 2% and he notes modest wage growth is inconsistent with this advanced stage of an economic recovery.