The Federal Reserve’s decision to hold rates steady signals that central bankers believe it is time to hit pause, at least temporarily, on their aggressive campaign to tame runaway inflation.
The latest data, not to mention several other factors, however, suggests it’s time for a full stop.
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I feel like the pause on rate hikes is to just avoid spooking the market aka investors. Anyone who works in the industry can tell you investors stomp their feet and cry whenever they don’t get what they want, and what they want is antithetical to the health of the market, so the Fed has to try and increase rates at a pace that doesn’t cause a complete spook/revolt from the investors. But the market is so leveraged I fear 5% may still not be adequate, and we’ll need to be at these rates and higher for a much longer time than the investor class wants to tolerate. Inflation won’t go down until there is some semblance of wealth redistribution from the large capital holders to normal market actors imo.
I mean, the meat of the article is about why it would be a mistake to keep raising rates.
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The latest consumer price index data, released on June 13, showed core inflation – the Fed’s preferred measure, which excludes volatile food and energy prices – falling to an annual rate of 5.3% in May 2023, the slowest pace since November 2021. That’s down from a peak of 6.6% in September 2022.
While the data shows inflation remains well above the Fed’s target of around 2%, there’s good reason to believe that it will continue to fall regardless of what the Fed does.
Shelter, a measure of the cost of owning or renting a home, is the largest component of the consumer price index, accounting for more than one-third of the total. In its latest report, the Bureau of Labor Statistics reported shelter costs rose 8% from a year ago. After stripping that out, inflation was up just 2.1%.
The thing is, the data reported by the bureau doesn’t reflect the reality of what’s happening in the current housing market.
The Bureau of Labor Statistics relies on a survey that gauges rental prices from 50,000 leases, many of which were signed during the rental bubble in 2021 and 2022. A better measure of current market rents is the Zillow Observed Rent Index. That index suggests rates are declining – rents rose 4.8% year over year in May, aligning with pre-pandemic rates.
Comparing the two measures suggests the official consumer price index data lags behind the market by four to six months. Using current rents would put inflation much closer to where the Fed wants it to be. Jason Furman, former chair of the government’s Council of Economic Advisors, created a modified version of core inflation – which uses a market-based measure of shelter prices – at 2.6%.
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[Emphasis mine]
