Not discussed at the Fed meeting? Rising housing costs.

Text size

Jerome Powell, Chairman of the US Federal Reserve

Kevin Dietsch / UPI / Bloomberg

The lack of news is generally good news, especially for financial markets when it comes to the Federal Reserve. The market reaction was therefore positive to the well telegraphed decision of the central bank on Wednesday to reduce the pace of its purchases of securities, the main stock indexes ending at record levels.

Markets appear relieved by assurances from Fed Chairman Jerome Powell that the Fed funds rate target will not be lifted from its current range of 0-0.25% anytime soon. The factors that cause inflation to be “high” are “supposed to be transitory”, according to the declaration of the Federal Open Market Committee.

Powell said committee members expected price pressures to ease once much-discussed supply chain bottlenecks ease in the course of 2022, although they added the qualifier “expected” to their now famous “transitory” description of inflation.

Not addressed at his post-FOMC press conference was a major driver of inflation measures and directly affected by ultra-relaxed monetary policy, housing costs. In all the photos of container ships anchored outside ports waiting to unload their cargo on docks already filled with containers, no houses or condos are visible on board.

Soaring house prices are not directly taken into account in price indicators such as the consumer price index, even if the S&P CoreLogic Case-Shiller National Home Price Index has jumped nearly 20% in the past 12 months. Like Joseph Carson, the former chief economist of Alliance Bernstein precise on his blog, if house prices were factored into the CPI as they were in the early 1980s, they would have increased by about 10%, almost double the rate of 5.4% year-to-year. the other.

Soaring housing costs could be linked to the Fed’s monthly purchases of $ 80 billion in Treasury securities and $ 40 billion in agency mortgage-backed securities, a policy explicitly aimed at lowering long-term interest rates. Record mortgage interest rates have been a primary factor in the rise in house prices, along with the frenzy to move out of cramped city apartments and into single-family homes in the suburbs and beyond, spurred by Covid- 19 and the ability to work from home a lot.

As expected, the FOMC said it would cut its purchases of MBS from the Treasury and agencies by $ 10 billion and $ 5 billion, respectively, in November and December. The central bank said it plans to make similar cuts in the monthly future, which would mean it will close its purchases by next June.

Powell pointed out that there had been no discussion of future policy rate hikes, although the Fed’s plan was to liquidate asset purchases before raising its rate target. That said, the treasury and financial futures markets incorporated two increases in 2022. Based on the


CMF

federal funds futures market, its FedWatch Tool places the odds of the first quarter point increase by next June at better than the same value, with at least a second hike coming by December 2022.

With Powell putting that dovish tilt on the taper ad, the


S&P 500,

the


Dow Jones Industrial

and the


Nasdaq Composite

all rose after the FOMC statement was released at 2:00 p.m. EDT, all ending the session at respective records.

Elsewhere, the Treasury yield curve steepened as well, with the yield on the benchmark 10-year note ending at a high of 1.606%, up seven basis points from morning levels, while the note at two years only increased by two basis points, to 0.47. %. (One basis point is 1/100 of a percentage point.) The US dollar index (ticker: DXY) also fell 0.2%. Taken together, higher stocks, a steeper yield curve and a weaker dollar all make for easier financial conditions in the wake of the FOMC news.

Powell stressed that the Fed would remain patient before tightening its policy by raising rates. Policymakers are sticking to their claim that inflation should ease once the tension in the supply chain eases. And he spoke of their “humility” in assessing when peak employment is reached given Covid-19 and its effects on labor market participation.

All in all, the Fed is slowly moving away from the extreme emergency policies put in place during the crisis period when the first wave of the pandemic hit the markets and the economy in March 2020. This is even if the recovery of the economy and markets arrived. a long way and inflation is reported as the biggest concern of consumers.

These higher prices, however, have markedly different impacts. Owners of stocks and other assets encourage them while those who feel them primarily at the supermarket and gas station feel a little differently.

Write to Randall W. Forsyth at [email protected]

Source link

About Robert Valdivia

Robert Valdivia

Check Also

Buy stocks to prosper. Buy bonds to sleep at night.

The Fed has been cautious, announcing it will start cutting its bond purchases but promising …

Leave a Reply

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