Today and tomorrow the Federal Reserve will hold its 7th Federal Open Market Committee meeting of the year It is a given that we will see a 75-basis point increase on Wednesday, but what is said about the December 13-14 meeting is more important. Expectations are that the Fed will signal a slower pace of rate hikes, perhaps as low as 50 basis points in December.
Arguably, even that is too much.
The FOMC’s ability to influence consumers and inflation has so far proven mixed. Product prices are falling and service prices are stickering. Perhaps this is because inflation in the 2020s is radically different from historical parallels. A unique combination of pandemic revenue stimulus and massive supply chain snarls has created a perfect storm. Therefore, the current situation does not lend itself to a simple solution.
But that doesn’t mean the Fed’s actions won’t have long-term consequences for the economy. Consider the chart above: It’s a definitive breakdown of the 40-year downtrend in 30-year fixed rate mortgages. In January 2021, those mortgages were as low as 2.65%; Today they are over 7%. So far, it’s been pouring in homebuyer traffic. This is already dramatically creaming homebuyers.
But not all home buyers: About 25% of homes purchased nationally are purchased with cash; In places like Manhattan it’s closer to 50%. And this was under normal, pre-epidemic conditions. Today, it’s close to a third nationwide. As you might guess, cash purchases tend to be more expensive homes bought by the wealthiest buyers; When more modest middle-class homes are bought for all cash, it tends to be by larger investors.
Which is par for the course for the Federal Reserve. The massive wealth gap expansion we saw in the post-GFC era was driven by the Fed. Instead of running banks through restructuring, they have been kept alive by the GIRP policy. The cost of capital had virtually no effect at all, not the least of which was making riskier assets – stocks, bonds, real estate, etc. – appreciably more valuable. ZIRP and QE made the rich richer.
As I said earlier, once the emergency is over, the emergency should also be defeated. This was evident in 2021 (maybe even late 2020). Post-pandemic inflation will eventually work itself out as supplies come online and fiscal stimulus winds down.
But that’s not what’s happening today: The FOMC, having cut rates to zero and kept them there for too long, is now making the opposite mistake of raising them too fast and too high.
And while we know that FOIMC rates are below official CPI levels, we also know that CPI is like all models – an imperfect picture of reality. It reports price growth with a very distinct interval and has trouble managing rapid rises or falls in house prices.
Regardless, the FOMC believes middle-class purchases of homes and automobiles are where they can best stifle inflation. It is unnecessarily harmful at best, and ineffective at worst.
Jerome Powell should know better…
30-year fixed mortgage rates, 2020-present
in the past:
How the Fed Causes (Model) Inflation (October 25, 2022)
Declining Traffic From Prospective Home Buyers (October 18, 2022)
Why is the Fed always late to the party? (October 7, 2022)
Who’s to Blame for Inflation, 1-15 (June 28, 2022)
How Everyone Miscalculated Housing Demand (July 29, 2021)