“The economy can handle tighter monetary policy”
This week was chockfull of action as central banks worked to set the path forward amid what can be grossly understated as turbulent economic conditions. Jerome Powell and his colleagues at the FOMC opted to “raise its policy interest rate by ¼ percentage point” and announced that they had “made excellent progress toward agreeing on the parameters of a plan to shrink the balance sheet” with the idea that runoff “could come as soon as our next meeting in May”. Under the hood, the vote was not unanimous, with St. Louis’s Bullard dissenting, as “he would have preferred a rate hike of 0.5 percentage points”. Explaining his dissent Friday, Bullard agreed with some earlier Fed comments, saying that “the burden of excessive inflation is particularly heavy for people with modest incomes and wealth and for those with limited ability to adjust to a rising cost of living”.
On the other hand, while the Bank of England had seen hawkish dissenting dynamics in its February meeting, highlighted here, the script was flipped at this week’s meeting. The BoE raised rates for a third time with the lone dissenting vote cast on the dovish side, in favor of holding rates steady at 0.5%.
Meanwhile, Japan was an outlier, opting to leave its short term and 10-year bond targets unchanged. BoJ Governor Kuroda said, “there’s a chance Japan will see inflation move around 2% from April onward”, but as “most of that is due to rising commodity prices”, “there’s no reason to tighten monetary policy. Doing so would be inappropriate”.
On a related note, in addition to the pressure being put on the Fed by policymakers such as Janet Yellen, a recent research paper from the Richmond Fed may have them hot under their collar. The paper, which found that there “has been a breakdown in the post-1995 relationship between inflation and the distribution of relative price changes”, posited that perhaps, maybe, potentially “the breakdown in the relationship between inflation and the share of relative price increases suggest that expansionary monetary policy may be an important factor in the ‘pervasive’ high inflation [Ed: the quotes are a nice touch] seen since October”.
“Getting a double whammy”
Caught in the crosshairs of both high inflation (aside, February PPI tied the revised January reading “for the biggest 12-month move ever”) and rising rates is the housing market.
On the price front, Zillow expects home value growth “to continue accelerating through the spring, peaking at 22% in May, before gradually slowing through February 2023”. Zillow reports that “despite the rapidly rising costs, demand from home buyers remains robust”, which has come hand in hand with home values continuing their upward rise: “home values rose 20.3% in just the past year alone, another new record for annual appreciation”. What’s more, “the rental market” is not immune to the effects of limited supply, and Zillow’s rent index showed that February “reversed January’s brief cooling trend” with rents “shooting up 1.1% from last month and 17% from last year”.
However, while Zillow remains optimistic about demand, some cracks are beginning (continuing?) to show. As the NAHB’s Eye On Housing blog reports, there are “growing concerns that increasing construction costs (up 20% over the last 12 months) and higher rates amid tightening monetary policy will price prospective home buyers out of the market”. Homebuilders must not be too pessimistic (or are at the mercy of momentum) given housing starts “rose to a seasonally adjusted rate not seen since 2006”. However, the NAHB did warn that though low inventory and demographics continue to support demand, “the impact of elevated inflation and expected higher interest rates suggests caution for the second half of 2022”. This caution is bolstered by the latest report from the NAR, whose chief economist noted that “Some [buyers] who had previously qualified at a 3% mortgage rate are no longer able to buy at the 4% rate”.
