The soaring cost of rent continues to hamper the Federal Reserve from implementing its planned interest rate cuts — with some analysts fearing that a changing dynamic in the housing market will derail Jerome Powell’s strategy to tame sky-high inflation.
Housing inflation, which reached a peak of 8.2% a year ago, fell to 5.6% in March, which is still too high to allow the Fed to cut its benchmark interest rate.
Economists and Wall Street investors anticipated that housing costs would drop at a quicker pace — allowing the central bank to follow through on its plan to make several rate cuts this year.
But stubbornly high price increases have forced the Fed to keep rates steady — with a rate cut expected no sooner than September, if at all this year.
Last month, Chicago Fed President Austan Goolsbee said that the persistence of outsized price increases in the housing sector was the largest impediment to the central bank’s effort to bring inflation down to its 2% target rate.
“The biggest danger to the inflation picture in my view… (is) the continued high inflation in housing services,” Goolsbee told a gathering of Illinois business people on April 4.
He added that based on market data on rents for new leases, “I have been expecting it to come down more quickly than it has. If it does not come down, we will have a very difficult time getting overall inflation back to the 2% target.”
“Housing inflation remains my most valuable indicator for the immediate future,” Goolsbee said. He also cautioned against the central bank waiting too long to begin its cutting cycle.
“If we stay restrictive for too long, we will likely see the employment side of the mandate begin to deteriorate,” Goolsbee noted.
Core inflation is made up of three categories — goods, housing and non-housing services.
Economists say that for inflation to return to 2%, it needs the average inflation rate for all three to hit the 2% figure.
Non-housing services and goods inflation have either returned or are on the verge of returning to pre-pandemic levels, but housing inflation remained stubbornly high.
Analysts believe it is only a matter of time before housing follows suit.
“I still think that check is in the mail, but unfortunately, it’s taking longer for that check to arrive than I anticipated,” David Wilcox, an economist at Bloomberg Economics and the Peterson Institute for International Economics, told The Wall Street Journal.
“I just don’t see an alternative outcome other than those low lease rates eventually manifest themselves in the official price indexes.”
The average price of one month’s rent in a one-bedroom, 700 square-foot apartment in the US is $1,515 — a 0.6% increase from a year ago, according to Apartments.com.
The housing rental market does appear to be slowing down some. The median rent for houses in the US was $2,350 as of Saturday — which is $45 less than a year ago, according to Zillow.
The Fed held interest rates steady earlier this month, raising a red flag on recent disappointing inflation data and extending a wait-and-see stance that could stretch into later this year.
But Powell downplayed the possibility of further rate hikes — a risk that has increasingly worried investors as signs of persistent inflation have continued to crop up.
“It’s unlikely that the next policy rate move will be a hike,” Powell told reporters on May 1.
“I’d say it’s unlikely.”
With Post Wires
