Federal Reserve rate hikes have helped slow overall prices, but they’re also keeping inflation stable because of how homeownership costs are factored into key indicators, expert says in housing Jim Parrott and Mark Zandi, chief economist at Moody’s Analytics.
In a Washington Post opinion article On Thursday, they urged the Fed to “declare victory” over inflation and start cutting rates. central bank policy makers meet next weekand markets expect them to keep rates stable at their highest level in 23 years.
Even though consumer inflation has fallen sharply from its peak two years ago, it has remained stuck above the Fed’s 2% target, prompting Chairman Jerome Powell to keep rates high for longer.
But that position is based on a “serious error of judgment,” according to Parrott, co-owner of the housing consulting firm Parrott Ryan Advisors and a former White House economic adviser during the Obama administration, and Zandi.
This comes from the way the Personal Consumption Expenditure Deflator, the Fed’s preferred inflation gauge, and the Consumer Price Index attempt to measure the cost of homeownership by estimating the rent of ‘a similar house nearby.
The approach is flawed, they write, because most homeowners either don’t have a mortgage or have a fixed-rate mortgage, meaning their real costs haven’t changed much. But as inflation measures estimate a notional rent based on rising real prices paid by tenants, landlords’ implicit costs rise.
Additionally, Parrott and Zandi said it is “virtually impossible” to estimate implicit rent in communities where most housing is owner-occupied or in situations where most rental housing serves multi-family residents while that owner-occupied housing serves single-family residents.
If the Fed abandoned this quirk of methodology, then inflation would hit the 2% target, they said.
At the same time, the Fed’s aggressive hikes have worsened the supply crunch in the housing market by making it harder to build new homes and discouraging homeowners from abandoning their low mortgage rates, they added.
“This disruption in the supply of housing increases the cost of buying and renting, driving up the very measure of inflation that the Fed relies on,” Parrott and Zandi wrote. “The tool the Fed uses to lower inflation does the exact opposite.”
Recent data shows that after a cooling earlier this year, rent prices have risen. To comfortably pay rent, you need to earn almost $80,000 a year, up from less than $60,000 five years ago. according to Zillow.
And although there are some signs of low property prices in some markets, national figures still show prices rising.
Parrott and Zandi are not the only commentators who see the Fed stuck in a box. Apollo chief economist Torsten Sløk said last month that central bankers were in a difficult situation. self-destructing loop.
“You can call this the paradox of Fed reflexivity: the more the Fed insists that the next move in interest rates is a cut, the more financial conditions will ease, making it harder for the Fed to to reduce interest rates,” he wrote.
