The Federal Reserve fears “signs of life” in the housing market means it could be “harder” to tackle inflation. House prices hit all-time record highs last year, with median prices increasing by 50 percent from January 2020.
However, in the latter half of 2022, spiked record-high interest rates helped push American home prices down 2.5 percent from their 2022 peak.
Minneapolis Federal Reserve President Neel Kashkari noted reports which say the housing market “is starting to show signs of life again because mortgage rates have come back down”.
But ringing alarm bells, the official said loosening financial conditions, which includes mortgage rates falling to 6.09 percent last week, isn’t great news for the Fed.
“You’re right it [loosening financial conditions] does make our jobs harder to bring the economy into balance”, Kashkari told CNBC.
“All things being equal, that means we’d have to do more with our other tools.”
Fortune explained that looser financial conditions could see rising home prices and rents erase progress that the Fed has made on the housing front.
“If the Fed can’t tame inflation in a rate sensitive sector like housing, it’d surely struggle with inflation further outside its rate hiking purview”, the report said.
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If financial conditions were to continue to loosen, Kashkari added the Fed would look to use “other tools.”
“It’d cause me to say we’d need to do more with the federal funds rate and we also have the balance sheet as well,” he said.
Meanwhile, Fed chair Jerome Powell said on Tuesday that disinflation “has begun” but is going to take time.
The disinflationary process, the process of getting inflation down, has begun and it’s begun in the goods sector, which is about a quarter of our economy,” the central bank chief said during an event in Washington, D.C. “
“But it has a long way to go. These are the very early stages.”
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At its most recent meeting, the Fed raised its benchmark interest rate a quarter percentage point, the eighth increase since March 2022, to a target range of 4.5 to 4.75 percent.
In his remarks Tuesday, Powell gave no indication of when the hikes will stop, and said it probably will take into 2024 before inflation gets to a point where the Fed feels comfortable.
The central bank targets two percent inflation, and it’s currently running well in excess of that by multiple measures.
“We expect 2023 to be a year of significant declines in inflation. It’s actually our job to make sure that that’s the case,” he said.
“My guess is it will take certainly into not just this year, but next year to get down close to two percent.”
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