Soaring rent is keeping the Federal Reserve from its promise, first made in January, to cut interest rates, the New York Post reports.
While two of the three categories that make up core inflation — goods and non-housing services — are in a holding pattern after ticking down — housing has remained stubbornly high.
Economists say that for inflation to tamp back down to 2%, the inflation rate on goods, housing and non-housing services all need to come down.
Housing inflation is currently 5.6%. While this is far below its peak of 8.2% a year ago, it is still too high by economists’ and the Fed’s standards.
The median rent for houses in the U.S. was $2,350 as of May 11, according to Zillow, $45 less than a year ago. The monthly rent for a one-bedroom, 700-square-foot apartment in the U.S. is $1,515, up 0.6% from a year ago, according to Apartments.com.
“The biggest danger to the inflation picture in my view [is] the continued high inflation in housing services,” Chicago Fed President Austan Goolsbee told a gathering of Illinois businesspeople on April 4.
Expensive housing prices are the largest impediment to the Fed’s struggle to bring inflation back down to 2%, Goolsbee said.
“I have been expecting it to come down more quickly than it has,” Goolsbee continued. “If it does not come down, we will have a very difficult time getting overall inflation back to the 2% target.”
Traders see U.S. rates at around 4% at the end of the decade, far higher than policymakers’ 2.6% long-run expectations.
Goolsbee warns that if the central back waits too long to cut interest rates, the economy could weaken far more than it would like:
“If we stay restrictive for too long, we will likely see the employment side of the mandate begin to deteriorate.”
Markets have continued to be optimistic that rate cuts are in the offing, with recent jobs data coming in weak. Even Tuesday morning, with April’s wholesale inflation coming in hotter-than-expected at 2.2%, stocks were holding steady.
David Wilcox, an economist with Bloomberg Economics and the Peterson Institute for International Economics, said, “I still think the check is in the mail. But, unfortunately, it’s taking longer for that check to arrive than I anticipated.”
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