Residential Magazine

The final whistle hasn’t been blown on inflation

By Arnie Aurellano

The kick went wide left. That’s what 28% of you said when assessing the Federal Reserve’s work in taming inflation according to a Scotsman Guide poll published in The Originator email newsletter, still the most popular poll published on the site. While the largest share of respondents believed that the Fed shanked the attempt, survey responses were all over the field.

Twenty-five percent said that the Fed was in the red zone, and another 25% said it was within field goal range. Fourteen percent said it hadn’t even crossed midfield. Well, it’s been a couple of months since Taylor Swift won the Super Bowl, so it seems like a good time to see how the central bank’s game plan is going.

“Unfortunately, I’m not a football fan, so I can’t give you a great football metaphor,” laughs Matthew Walsh, assistant director and economist at Moody’s Analytics. “Maybe not to punt on the question here, but I think it’s very early to grade the Fed’s performance right now, at least in terms of their hiking cycle.

“I think you can absolutely be critical of the Fed for waiting too long to hike interest rates in 2022,” Walsh says. “But whether or not they’re holding interest rates too high for too long, it’s still a little early to make that call.”

Walsh notes the divergent routes that the housing market and the greater economy have run since the Fed’s policy turned hawkish more than a year ago. The economy, Walsh noted, is in pretty good shape. Job creation remains strong, unemployment is low and stable, and inflation appears headed toward the Fed’s stated target range of 2%. But the housing market suffered through the equivalent of a 3-14 season.

“The public perception of what inflation means versus what economists mean when they talk about inflation are sometimes a little bit different.”

– Doug Duncan, chief economist, Fannie Mae

For his part, Federal Reserve chair Jerome Powell has been swift to acknowledge the struggles of the housing sector. Sometimes it comes off like he’s running an end-around, however.

In comments made in February, Powell said: “We’re not targeting housing price inflation, the cost of housing or any of those things. Those are very important things for people’s lives, but those are not the things we’re targeting. We’re also well aware that when we cut rates at the beginning of the pandemic, for example, the housing industry was helped more than any other industry. And when we raise rates, the housing industry can be hurt, because it’s a very rate-sensitive sector.”

Accurate? Sure. The man’s here to tackle inflation, not to sugarcoat things for the real estate folks. But knee-deep in a housing recession, it still feels like unnecessary roughness. It hasn’t exactly earned the central bank a crowd of fans outside the residential market, either.

“If you go to a grocery store and ask somebody, they’ll tell you that they don’t feel like inflation’s gone away,” says Doug Duncan, senior vice president and chief economist at Fannie Mae. “But what they’re talking about is not the rate of change in prices. They’re talking about the fact that prices went up, and they never came back down. That’s the frustration.

“I had an Uber driver that told me, ‘Well you can say what you want about inflation, but I’m not seeing prices come down.’ The public perception of what inflation means versus what economists mean when they talk about inflation are sometimes a little bit different.”

By generally accepted measures, Duncan says, the Federal Reserve has brought the inflation rate down from over 9% a year and a half ago to around 3% today. And the Fed’s attempt to bring inflation under control hasn’t damaged the job market with unemployment still under 4.5% in most states.

“But the consumer, while they may be happy about the stability of their job, they’ve seen a big decline in their purchasing power, particularly in things that are staples. … What will change [consumers’] perspective will be if incomes keep growing faster than the rate of inflation, so eventually they will catch up in terms of purchasing power,” Duncan says.

“Right now, their incomes have not caught up to the rise in costs for their household, and so they’re still quite frustrated with that.”

Walsh at least believes in the Fed’s forward progress, although he says the next few decisions and next few months are pivotal.

“This is kind of the make-or-break moment for them,” he says. “Obviously, holding rates higher for longer for too long will have really detrimental effects on business investment and consumer spending, not to mention housing.”

January’s unexpected increase in the Consumer Price Index (CPI) suggests that the Fed’s lack of confidence in an early rate cut holds up under review, says Duncan. He notes that things sometimes don’t move smoothly.

“It’s a bumpy process,” he says. “There’s constant change in the prices of different things in the world economy. … The Fed is legitimately saying, ‘Look, we’re not there,’ and now they’ve got a piece of proof from the January CPI. But that won’t keep the market from arguing, ‘You should cut, you should cut, you should cut,’ of course.”

When will that time come? Walsh says that Moody’s pegs May as potentially the first appearance of a benchmark rate cut, while Duncan believes it will be June at the earliest.

So, let’s circle back to this again in the summer. At the very least, it’ll be baseball season by then, so in any case, we’ll have some new metaphors to throw around. ●


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