Will turmoil in the housing market change the course of the Fed?

As the Federal Reserve weighs an excessive rate hike this year, concerns are growing that the central bank’s monetary actions may be unnecessary. threaten financial stability.

Instead of raising the benchmark interest rate by 75 basis points for the fourth consecutive meeting of the Federal Open Market Committee, some economists are urging the Fed to slow the rate of increases or even stop them altogether to allow the economy to absorb them.

‘Market Forecast 75 [basis points]75 [basis points]50 [basis points]25 [basis points]. Claudia Siham, founder of Arrow Consulting and a former Federal Reserve economist, said that’s given a lot for how far we’ve come. “My base case is not that the US financial markets are collapsing, however, the likelihood of that happening is increasing. If they continue to be aggressive, all 75 [basis point hike] increase the chances of financial instability.

Federal Reserve Chairman Jerome Powell
US Federal Reserve Chairman Jerome Powell emphasized that the FOMC is committed to taming inflation no matter what, but some economists believe the cooling in the housing market could be an indication that further rate hikes could miss the mark. .

Bloomberg News

Economists say part of the problem is Fed Chair Jerome Powell’s commitment to continue tightening monetary policy until the personal consumption expenditures index – a measure of inflation that strips out volatile factors such as energy and food – and the labor market shows signs of continued cooling. But because these indicators often lag in shifts in the real economy, tightening monetary policy aggressively until it changes could lead to an excessive correction, Arrow said.

She pointed out that if the Fed wanted to prove that its monetary policies were working It has a lot in the housing market. The average 30-year mortgage rate has risen to about 7%, more than double what it was at the beginning of the year, according to the Mortgage Brokers Association. Applications for new mortgages have fallen for four consecutive months to their lowest level since 1997 and home prices have begun to fall in some markets, with further price cuts expected as demand dries up.

“Obviously how much the Fed is raising rates has really had a big impact in the places where it comes first: the housing market,” Sam said. “If they hadn’t drawn themselves at a corner with [PCE] or bankruptcy, they could easily tell that story.”

Saah said she would like to see a moratorium on raising interest rates, but she does not expect that to happen unless a crisis emerges.

Diane Sonk, chief economist at KPMG, said the Fed should pay attention to changes in the housing market, not only because it is among the most interest-rate-sensitive sectors of the economy, but also because of the side effects associated with it. He. She. Fewer home purchases mean fewer big-ticket related purchases such as appliances, furniture and cars, and the drop in values ​​makes homeowners less willing to indulge in savings, she said.

Sonek said she would like to see the Federal Reserve raise interest rates by 50 basis points next week and see how the markets react.

Sonek said she did not believe the housing market crash would be enough to destabilize the financial situation on its own. Unlike a mid-term housing bubble, homeowners have more equity in their homes, and mortgage underwriting is healthier, she said, adding that the Fed has made sharp declines in the housing market a key component of its stress test scenario, which Make all the big banks. It is handled with relative ease this year.

However, Sonk said, the Fed should note how much interest rate changes are affecting at home and consider that their cascading effects may be more significant abroad.

“Like it or not, the Fed is also the de facto central bank for the rest of the world, exporting inflation with dollars,” she said. “These are important things to consider. Financial stability is the uncomfortable third stage of the dual mandate.”

After the Fed Second rise of 75 basis points in the year In July, Powell said the move was It does not pose a threat to financial stabilitynoting that the banks were well capitalized and that other financial conditions were solid enough to avoid disasters.

Historically, the Federal Reserve has kept monetary and financial stability considerations separate. While monitoring the threats posed by banks – both individually and collective Monetary policy, through its supervisory and supervisory bodies, tends to be isolated from considerations of financial stability. Some economists say this approach has served the Fed well in the past by giving it more freedom to maneuver, but it hasn’t been without consequences.

Swonk refers to the Latin American debt crisis of the 1980s that resulted from monetary changes made under then-Federal Reserve Chairman Paul Volcker. Others blame a series of sovereign debt crises in the 1990s on a period of tightening overseen by then-President Alan Greenspan. While those incidents had little impact on the United States at the time, the increasing globalization of the financial system could raise the stakes this time around.

“We’re in a different world now,” said Sonk. “It’s not the ’80s; we’re a lot more financially intertwined than we’ve ever been before.” “Even as countries pull out of each other and want to be self-sufficient and independent from each other and be more protectionist… we are more connected than we were before on a financial basis.”

So far this year, the Fed has raised interest rates by 3 percentage points and got rid of more than $200 billion from its balance sheet — a practice that has sent mortgage rates higher by ending the Fed’s role as a buyer of mortgage-backed securities.

In public comments, Fed governors have been steadfast in their commitment to cutting inflation, often indicating that further tightening will likely be necessary. But in recent weeks, some officials have given voice to the game’s stability risks.

On September 30, Federal Reserve Vice Chair Lyle Brainard gave a speech on financial stability considerations for monetary policy, in which she noted that financial conditions around the world are contracting at a historically rapid pace and that such activities can be particularly harmful to emerging economies.

“The Fed’s deliberations are based on an analysis of how US developments affect the global financial system and how external developments in turn affect the US economic outlook and risks to the financial system,” Brainard said. Monetary policy officials from other countries about the evolution of the outlook in each economy and the implications for policy.

In another October 10 speech, Brainard said that “the combined effect of simultaneous global tightening is greater than the sum of its parts,” and policy changes could challenge existing financial vulnerabilities.

Kansas City Federal Reserve Chair Esther George, a voting member of the Federal Open Market Committee this year, has expressed concern that the Fed could move too quickly on its policy changes. In June, it said it voted against the committee’s first 75 basis point increase this year, fearing it would create “policy uncertainty.”

This month, George reiterated those concerns in a webinar hosted by S&P Global.

“While I expect prices should go higher for a sustained period, I see risks about moving very suddenly to this new higher level,” she said. “Moving too quickly can disrupt financial markets and the economy in a way that may ultimately be self-defeating, and although policy changes move too quickly to the financial markets, the impact on the real economy happens late.”

George said rapid changes increase interest rate risks for banks. She also cited the sharp change in mortgage pricing as one of several indicators that financial markets have already responded to the Fed’s policy adjustments.

Despite these indications and admissions, some economists fear that the Fed would rather risk going too far to lock in inflation than not going far enough.

The FOMC has been late in tackling inflation this year, and its members — and specifically Powell — are feeling pressure to make up for lost time, said Kenneth H. Thomas, chief advisor to the Community Development Fund and former professor of finance at the University of Pennsylvania’s Wharton School.

“Everyone agrees that ‘transient’ Jay Powell moved too slowly last year and overcompensated by moving too fast this year,” Thomas said. [Powell] He has done most of his job fighting inflation and should now allow the standard rate of labor to be increased.”

Leave a Reply

Your email address will not be published. Required fields are marked *