GSY - The Fed Is Done Hiking
2023-07-19 05:04:00 ET
Summary
- There is about an 18-month lag between changes in home prices and changes in the Owners' Equivalent Rent component of the CPI.
- The Fed needs to realize this now, and at the very least make it clear at next week's FOMC meeting that it plans no further hikes to short-term interest rates.
- Mortgage rates are still punishingly high (~7% for 30-yr fixed rate mortgages) and that is making housing unaffordable for many millions of prospective homebuyers.
Last week's June CPI news surprised the market, but it didn't surprise me. The demise of inflation is playing out almost exactly as I've been anticipating for the past year or so.
Chart #1
Chart #1 shows the 6-mo. annualized change in the CPI (3.3%) and the CPI less shelter (1.4%), with the green line representing the Fed's 2% target. If it weren't for shelter costs, which are being artificially inflated (housing prices and rents are flat to down in the past year or so, but the measure of those costs is delayed by more than a year by the methodology the BLS uses), then inflation right now is well under the Fed's target.
Chart #2
Chart #2 shows the 1 and 3-mo. annualized change in the component of the CPI. Inflation in this component has turned down in recent months (i.e., OER is still rising, but at a slower rate), but it has a long way to go, as suggested by Chart #3.
Chart #3
Chart #3 shows that there is about an 18-mo. lag between changes in home prices and changes in the Owners' Equivalent Rent component of the CPI. Home prices haven't risen for at least a year, but the OER component of the CPI is still increasing. It likely won't turn flat or negative for at least the next 6-9 months.
The Fed needs to realize this now, and at the very least make it clear at next week's FOMC meeting that it plans no further hikes to short-term interest rates. The market, fortunately, has come to understand this, but it would be very helpful if the Fed eliminated lingering doubts.
Meanwhile, lower interest rates would be a welcome development for the economy. Mortgage rates are still punishingly high (~7% for 30-yr fixed rate mortgages) and that is making housing unaffordable for many millions of prospective homebuyers. Soaring interest rates on Treasuries have sent the interest cost of our mega-sized national debt to the moon, adding almost $1 trillion to this year's federal deficit.
Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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The Fed Is Done Hiking