The Fed Conundrum and the Housing Market Collapse
Updated
The Fed money tightening policies are using interest-rates as a lever to fix a balance sheet problem.
Higher rates feed right back into the CPI, initiating the doom loop.
After the financial crisis of 2008, The Fed employed a policy action to reduce the federal funds rate to a range of 0-0.25% for seven-(7) years, during which time the CPI fell.
Post-pandemic (COVID), the CPI is 97% correlated to the Fed balance sheet.
Looking historically, in 1980's, the Fed Rate was ~19% (real rate was 8%). Compared to today, the Fed Rate is under 3% and Real Fed Rate is at -6%.
Folks already crying about a 3% Fed Rate.
A colossal policy error in the making, or is everything going "according to plan"?
Higher rates feed right back into the CPI, initiating the doom loop.
After the financial crisis of 2008, The Fed employed a policy action to reduce the federal funds rate to a range of 0-0.25% for seven-(7) years, during which time the CPI fell.
Post-pandemic (COVID), the CPI is 97% correlated to the Fed balance sheet.
Looking historically, in 1980's, the Fed Rate was ~19% (real rate was 8%). Compared to today, the Fed Rate is under 3% and Real Fed Rate is at -6%.
Folks already crying about a 3% Fed Rate.
A colossal policy error in the making, or is everything going "according to plan"?
Note
Tidbit regarding the "Fed Conundrum" Chart in the US CPI Section of the Chart:The only way inflation comes down is if the housing market collapses.
Because in the near-term Fed tightening is increasing inflation by driving rents higher.
Fed Governor Christopher J. Waller states as rent leases expire, they will be rolled over at new higher rents well into 2023. Higher interest-rates on homes have collapsed rental vacancies, see: federalreserve.gov/newsevents/speech/waller20221006a.htm
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