thedragonandtiger| New Federal Reserve News Agency: High housing costs undermine Fed's interest rate cut plan

Financial Associated Press, May 12 (editor Niu Zhanlin)-Comprehensive Federal Reserve interest rate resolution in May and a series of recent officialsThedragonandtigerFrom the point of view of the positionThedragonandtigerIt is clear that the Fed has not given up its plan to cut interest rates this year, and the market expects the central bank to make a "first cut" in September.

On Saturday night local time, Nick Timiraos, a prominent journalist known as the "new Fed news agency", wrote that the expectation that housing costs would slow this year had been the central basis for the Fed's belief that inflation would slow enough to reassure it to cut interest rates.

But after waiting for more than a year, this slowdown has yet to come. Some analysts worry that this slowdown may not happen at all because of the dynamic changes in the property market. If so, the case for interest rate cuts will be greatly weakened.

In recent years, housing cost has played an important role in inflation, accounting for 1/3 of the consumer price index (CPI) and about 1/6 of the personal consumption expenditure price index (PCE), which is the Fed's most concerned indicator of inflation.

Federal Reserve Chairman Colin Powell has previously said he expects the decline in rental costs to eventually be reflected in broader price data, allowing policy makers to cut interest rates at some point. "I believe that as long as rents remain low, this will be reflected in the inflation data," Powell said at a news conference last week. "

However, the recent series of data sends some ominous signals. According to a survey released by the New York Federal Reserve on Monday, American consumers' dream of owning a home has become more distant, with respondents expecting house prices to rise by 5% in a year's time.Thedragonandtiger.1%, up from 2% predicted a year agoThedragonandtiger.6%; in terms of rent, respondents believe that costs will rise by 9.7% in a year's time, the second highest in the history of the survey.

Housing has become an economic burden in the United States, and some families can no longer afford other necessities, including food and medical care, and people are forced to work overtime and borrow money to pay their monthly housing bills, said the head of economic research at Redfen, a US real estate agency.

Timiraos points out that single-family rents rose 14 per cent in 2022, but rent growth slowed to 3.4 per cent in February from a year earlier, reflecting increased competition for the supply of renovated apartments and tepid income growth adjusted for inflation.

Housing inflation needs to be reduced to 3.5%

Us core PCE inflation was 2.8 per cent in march, but not much lower than in December. Housing costs help explain why core inflation has stagnated in recent months rather than continuing the previous slowdown.

Chicago Fed Chairman Goodsby said in an interview last month that the development of the housing market did not meet the Fed's expectations. "but I still think it will slow down, and if that doesn't happen, the Fed may find it difficult to meet its target of reducing inflation to 2%."

Core inflation is divided into three distinct components: goods, housing and non-housing services. To reach an inflation rate of 2%, the Fed does not need all of these indicators to reach 2%.

In the decade before the pandemic, core inflation was slightly below 2 per cent, because commodity inflation was about-1 per cent, housing inflation was 2.5 to 3.5 per cent, and non-housing services inflation was just over 2 per cent.

The main reason for the slowdown in inflation last year was a return to pre-pandemic trends in commodity prices. For inflation to return to 2 per cent, inflation for non-residential services must fall below 3 per cent from the current 3.5 per cent, and housing inflation must fall from 5.8 per cent to about 3.5 per cent.

Some doubt whether housing costs will help reduce inflation as expected. Rents tend to be sensitive to wages and income, and as long as wages and income rise steadily, rents may not slow down so much.

A key reason for the slowdown in market rents is that the industry is increasing the supply of new apartments in record numbers. However, some industry executives say these supplies are being absorbed rapidly because of increased immigration and steady growth in jobs and wages.