The housing market crisis shows that the Fed’s anti-inflation tools do the opposite

According to housing expert Jim Parrott and Mark Zandi, chief economist at Moody’s Analytics, the Federal Reserve’s interest rate hikes have helped slow the overall price level, but they have also caused inflation to soar because of the cost. Home ownership affects key metrics.

in one Washington Post posts on Thursday, they called on the Fed to “declare victory” over inflation and start cutting interest rates. Central bank Policymakers will meet next weekand the market expects them to keep interest rates steady at their highest level in 23 years.

Although consumer inflation has fallen sharply from its peak two years ago, it remains above the Fed’s 2% target, prompting Chairman Jerome Powell to keep interest rates higher for longer.

But that position is based on a “serious misjudgment,” according to Parrott, co-owner of housing consulting firm Parrott Ryan Advisors and former White House economic adviser during the Obama administration, and Zandi.

It stems from how the personal consumption expenditures deflator, the Fed’s preferred measure of inflation, and the consumer price index attempt to measure the cost of homeownership by estimating rent for a comparable home. from nearby.

This approach is flawed, they write, because most homeowners either have no mortgage or have a fixed-rate mortgage, meaning their actual costs don’t vary much. But because inflation indexes are estimating nominal rents based on rising real prices that renters pay, landlords’ implicit costs are also rising.

Additionally, Parrott and Zandi said it is “virtually impossible” to estimate potential rents in communities where most homes are owner-occupied or in situations where most rental portfolios serve serves multi-family residents while owner-owned inventory serves single-family residents.

If the Fed removed that weakness in its methodology, they said, inflation would be at its 2% target.

Meanwhile, the Fed’s aggressive interest rate hikes have exacerbated tight supply in the housing market by making it harder to build new homes and discouraging homeowners from forgoing interest. low mortgage rates.

“This breakdown in the housing supply curve is increasing the cost of buying and renting a home, boosting the very measure of inflation that the Fed relies on,” Parrott and Zandi wrote. “The tool the Fed is using to reduce inflation is doing exactly the opposite.”

Recent data shows that after cooling off earlier this year, Rents have increased again. To comfortably pay rent, you need to earn close to $80,000 a year, up from less than $60,000 five years ago. based on Zillow.

And although there are some signs weak house prices In certain markets, nationwide figures still show prices are rising.

Parrott and Zandi are not the only commentators who see the Fed trapped in a box. Apollo chief economist Torsten Sløk said last month that central banks were in a difficult situation. self-defeating loop.

“You might call this the Fed’s Cutting Reflex Paradox: The more the Fed insists that its next move on interest rates is a cut, the easier financial conditions will be, making it harder for the Fed,” he wrote. cut more”.

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