Economics
The Federal Reserve is responsible for maintaining financial stability in the US. They grew their balance sheet and lowered interest rates, which provided a quick stimulus to our economy and created short-term demand to combat the pandemic’s economic effects. However, historically high inflation has been the long-term consequence.
One way the Fed combats inflation is to raise the Federal Funds Target Range, which in turn raises short-term interest rates. Another way they reduce inflation is to reduce the size of their balance sheet. The Fed is currently doing both.
INTEREST RATES
On March 15, 2022, the Fed raised the overnight lending rate 0.25 points and outlined the potential for seven more rate hikes before the end of the year. Interest rates act as a governor on the economy. When the Fed raises the interest rate, the goal is to slow down spending, which lowers demand –in turn eventually lowering prices as well.
BALANCE SHEET
In March of 2020, the US balance sheet totaled $4.7 trillion, and today (March 2022) it sits at $8.9 trillion. They plan to deploy “rapid reduction” strategies, which typically include selling securities and then not reinvesting in mature securities. This puts upward pressure on long-term rates as demand decreases, also causing prices to decrease.
The escalation we are seeing in construction is not driven by just inflation. Supply chain issues, politics, natural disasters, and technology also impact escalation. For construction projects in their infancy, we are consistently asked if and when we will see inflation and escalation corrections in the economy, and if it would be worthwhile to delay a project start in hopes of lower material prices. Truthfully, even the most influential experts are not comfortable making those predictions at this time. Each project team, including the design team and owner, will need to put together a market-specific strategy weighing a delayed project start against other project priorities such as construction timing requirements, speed-to-market options, and replacing old assets.
The type of facility proposed is also important. As we outlined in our healthcare market focus above, waiting is not worth the potential impacts, as healthcare typically stays steady through booming times and economic dips. The overall volume warrants moving ahead with an escalation strategy rather than delaying starts.
