Tags: fed | inflation | rates | economy | investors | housing

Despite Fed Disagreement, Rates and Inflation Will Continue to Soar

Despite Fed Disagreement, Rates and Inflation Will Continue to Soar

Wednesday, 23 May 2018 03:17 PM Current | Bio | Archive

  • INDICATOR: April New Home Sales and FOMC Minutes
  • KEY DATA: Sales: -1.5% Over-year: +11.6%
  • IN A NUTSHELL: “The new home market is doing OK despite the rise in interest rates, but how much higher rates will go is uncertain.”

WHAT IT MEANS: The housing market is being studied using a microscope to determine if rising rates are becoming a major problem and right now, that is not the case. Yes, new home sales faded a touch in April, but over they year, demand has increased double-digits. That is the case whether you look at it as April to April or the first four months of 2018 compared to the same period in 2017. And unlike the existing home market, supply is not a huge issue. The number of homes on the market is keeping up with sales, so the inventory, as measured by months of supply at the given sales pace, is modestly below what would be considered to be decent. Yes, sales have a way to go before they would be considered normal, but another year of double-digit increases would largely wipe out the gap.

The Federal Reserve released its summary, which they call minutes, of the May 1-2 FOMC meeting. Not surprisingly, there were differences of opinion on most issues, but two caught my attention. The first concerned inflation. While almost all agreed it had moved up nearly to the Fed’s 2% target, some were uncertain the rate would be sustained over the longer-term while others were concerned that stronger growth and tight labor markets might create conditions “that would eventually require an abrupt policy tightening”. “It was also noted that a temporary period of inflation modestly above 2 percent would be consistent with the Committee’s symmetric inflation objective and could be helpful in anchoring longer-run inflation expectations at a level consistent with that objective”. In other words, it would be good to let inflation run hot. That is a pretty sharp difference in opinion. The second issue was the communication of the pace and duration of rate increases. Some thought the FOMC was getting close to what is a “neutral” funds rate, where the Fed is neither stepping on the gas nor the brake. That would require a change in the statement where it indicates that the rates would remain low for an extended period and/or that monetary policy was accommodative. That looks like a hint that some members don’t think rates will rise that much more.

MARKETS AND FED POLICY IMPLICATIONS: While the economy is generally viewed as being strong by just about everyone, there remains uncertainty about inflation and therefore the path of interest rates. The inflation hawks on the Fed seem to be outnumbered, at least right now, by the doves. That does not mean there will not be a rate hike in June. Indeed, the minutes noted that “Participants generally agreed with the assessment that continuing to raise the target range for the federal funds rate gradually would likely be appropriate if the economy evolves about as expected”. So, expect a hike in June. And if inflation continues to accelerate as the economy grows more strongly, additional increases this year are likely. I still expect there to be four rate hikes as I think the rising wage, commodity and energy price pressures will start being passed through. If we are already at 2%, there is no place to go but above the target and that is likely to be the case during the second half of the year. But there is a lot of disagreement at the Fed, so you can never say anything with certainty when it comes to monetary policy.

Joel L. Naroff is the president and founder of Naroff Economic Advisors, a strategic economic consulting firm.

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The new home market is doing OK despite the rise in interest rates, but how much higher rates will go is uncertain
fed, inflation, rates, economy, investors, housing
Wednesday, 23 May 2018 03:17 PM
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