SANTA ANA, CA, April 13, 2009--Bob Bach, (top right photo) senior vice president and chief economist at Grubb & Ellis Co. reports today the Federal Reserve's balance sheet (top left chart) has ballooned since last September because it has implemented several programs to combat the credit crisis.With the target federal funds rate as low as it can go – in a range of zero to one-quarter percent – the Fed has turned to "quantitative easing" including enhanced levels of liquidity for financial firms, direct lending to borrowers and investors, purchases of high-quality assets such as Treasury securities, and support for troubled institutions such as Bear Stearns and AIG.
These programs intersect with commercial real estate at a couple of levels.
The Term Asset-Backed Securities Loan Facility (TALF), although off to a slow start, may be extended to cover commercial mortgage-backed securities if it can be modified to accommodate the longer terms typical of CMBS loans.
The rapid expansion of the Fed’s balance sheet raises the specter of inflation; this could work to the advantage of commercial real estate, which traditionally has been viewed as a hedge against inflation.
However, inflation may not become a problem unless the economy bounces back quickly, which doesn't seem likely.
A gradual recovery would, in theory, give the Fed a window to sell off its assets at an orderly pace, thereby removing excess liquidity from the economy before inflation has a chance to accelerate.
Source: Federal Reserve, Grubb & Ellis
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