Wait-And-See: Powell on Rate Cuts, Housing Inflation and Market Rents
At the end of 2023, Federal Reserve Chair Jerome Powell noted that three rate cuts were likely for 2024. Yet, leading up the the April 30- May 1 FOMC meeting, nobody was expecting the first cut to happen, as stubborn inflation has left the Fed in a holding pattern. Yesterday, it was announced that the Fed would continue to hold rates steady.
During his FOMC press conference on May 1, 2024, Powell remarked that inflation is still too high, and the Fed needs more confidence that inflation is moving toward the 2% target before considering rate cuts. He also indicated that is unlikely the next policy move will be a rate hike—an announcement that led to a significant rally in major stock indexes.
As the Fed looks for signs of cooling inflation, it is closely monitoring the labor market and is prepared to adjust its policies in response to any significant changes. The resilience of the job market is particularly important, as it could influence the timing of future rate adjustments. Additionally, starting in June, the Fed plans to implement adjustments to its quantitative tightening strategy by reducing its monthly cap on Treasury securities. This change will significantly lower the annual reduction in holdings compared to the initial amounts set when the program began, signaling a cautious approach to shrinking the Fed’s balance sheet.
Of course, Powell spoke about housing during his press conference—noting that housing disinflation continues to lag. Below, find all the timestamps when Powell spoke about housing, including his expectations for market rents.
COMMENTS ON HOUSING FROM POWELL’S OPENING STATEMENT
02:05 – “Consumer spending has been robust over the past several quarters, even as high interest rates have weighed on housing and equipment investment. Improving supply conditions have supported resilient demand and the strong performance of the U.S. economy over the past year.
03:53 – “My colleagues and I are acutely aware that high inflation imposes significant hardship as it erodes purchasing power, especially for those least able to meet the higher costs of essentials like food, housing, and transportation. We are strongly committed to returning inflation to our 2 percent objective.”
HOUSING-RELATED COMMENTS FROM THE Q&A SEGMENT OF FOMC PRESS CONFERENCE
07:52 – QUESTION FROM HOWARD SCHNEIDER, REUTERS:
“Do you consider the current policy rate still…are you confident that it’s sufficiently restrictive to get inflation back to 2%?”
Powell’s response (08:06):
“I do think the evidence shows you know pretty clearly that policy is restrictive and is weighing on demand and there are a few places I would point to for that. You can start with the labor market. So, demand is still strong—the demand side of the labor market in particular—but it’s cooled from its extremely high level of a couple years ago. And you see that in job openings you saw more evidence of that today in the Jolts report, as you’ll know. It’s still higher than pre-pandemic but it has been coming down both in the Indeed report and in the Jolts report. That’s demand cooling. The same is true of quits and hiring rates which have essentially normalized.
“We also look at surveys of workers and businesses and ask workers, ‘Are jobs plentiful?’ and ask businesses, ‘Are workers plentiful; is it easy to find workers?’ And you’ve seen that the answers to those have come back down to pre-pandemic levels. You also see it in inter-sensitive spending like housing and investment. You also see that higher interest rates are weighing on those activities so I do think it’s clear that that policy is restrictive.”
19:42 – FOLLOW-UP QUESTION FROM STEVE LIESMAN, CNBC:
“What particular areas were sort of temporary or blips in the inflation data in the first quarter? And what’s the dynamic by which you expect them to work out in the coming months and quarters?”
Powell’s response (19:53):
“Yeah…we have put the thing under a microscope. I will say nothing is going to come out of that that’s going to change the view. I think that, in fact, we didn’t gain confidence and that it’s going to take longer to get that confidence.
“But confidence…you know the story, what’s happened since December is you’ve seen higher goods inflation than expected and you’ve seen higher non-housing services inflation than expected, and those two are working together to be higher than we had thought. There are stories behind how that happened, and you know we…I think my expectation is that we will, over the course of this year, see inflation move back down. That’s my forecast. I think my confidence in that is lower than it was because of the data that we’ve seen.
“So, you know, we’re looking at those things. We also continue to expect, and I continue to expect, that housing services inflation, given where market rents are, those will show up in measured housing services inflation over time. We believe that it will, it just looks like there are substantial lags between when lower market rates turn up for new tenants and when it shows up for existing tenants or in housing services.”
38:06 – QUESTION FROM COURTENAY BROWN, AXIOS:
“I wanted to follow up on something you mentioned earlier on housing inflation. There’s kind of been this long-awaited disinflation in shelter that still hasn’t arrived. So I guess two questions: how do you explain the substantial lags between some of the private sector data we’re seeing and the government data? And how confident are you that rents will be helpful on the inflation front in the coming months?”
Powell’s response (38:38):
“So, essentially there are a number of places in the economy where there’s just lag structures built into the inflation process, and housing is one of them. So when…a new person goes to rent an apartment, that’s called market rent. And you can see market rents are barely going up at all. The inflation in those has been very low. But before that, they were incredibly high. They sort of led the high part.
“So, what happens is those market rents take years, actually, to get all the way into rents for tenants who are rolling over their leases. Landlords don’t tend to charge as much of an increase to a rollover tenant for whatever reason, and what that does is it builds up a sort of an unrealized portion of increases when there have been big increases. And what happens is, you know, it’s complicated, but the story is it just takes some time for that to get in.
“Now, I am confident that as long as market rents remain low, this is going to show up in measured inflation, assuming that market rents do remain low. What will be the exact timing of it? I think we’ve learned that the lags are longer—we now think significantly longer—than we thought at the beginning. And so, I’m confident that it will come but not so confident in the timing of it. But yes, I expect that this will happen.”
Posted by Vanessa Bowman | May 2, 2024 | Housing Market, RE News
https://nowbam.com/wait-and-see-powell-on-rate-cuts-housing-inflation-and-market-rents/
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