Why The Fed Is Mostly Powerless To Lower Housing Inflation | Global News Avenue

Fed Chairman Jerome Powell admitted at a congressional hearing Tuesday that the Fed’s job is to control inflation but to one of the most impacted drivers.

Housing is the largest expense in most people’s budget and it is by far the largest component of the formal cost of living measures the Fed uses to measure inflation. Powell said at a Senate Finance Committee hearing Tuesday that the Fed could place its thumb on the scale of the economy to broadly affect inflation. .

House prices soared during the pandemic, helping to raise inflation to a culmination that has not been seen in decades. Inflation has cooled since then, getting closer to the Fed’s 2% annual target, but the stubborn housing costs have prevented the high inflation from completely eliminating.

Most importantly, record lows during the pandemic hit the highest average interest rate on 30-year mortgages in decades. The growth is partly due to the Fed raising the benchmark Fed funding rate to slow the economy and control inflation.

The Ministry of Finance plays an important role

Although the Fed has played a role in raising mortgage rates, central banks have limited capabilities. this Feeding funds rate Determines the interest rates that banks can lend to each other and seriously affects the short-term interest rates of various loans, including credit card and auto loans.

On the other hand, 30-year mortgage interest rates are closely related to different financial instruments: 10-year yield of the Ministry of Finance. These yields are affected by bond traders’ expectations for future Fed funding rates.

The current fiscal rate of return is higher than usual For many reasonsPowell said that including investors’ expectations of inflation, whether there will be recession or not, and other factors, “is not particularly closely related to Fed policy.”

The Fed lowered interest rates late last year, but the cuts did not transfer mortgage rates. Now. Powell and other Fed officials said the central bank has temporarily put aside further tax cuts and may not lower Fed funding rates anytime soon. in addition, Long-term housing shortage No matter what the Fed does, it may put pressure on prices to rise.

“Once we lower the interest rate and the interest rate returns to lower levels, mortgage rates will drop,” Powell said at the hearing. “I don’t know when it will happen, and even if that happens, we’re still in many places.” There will be a housing shortage.”