Are we there yet? Children ask that question endlessly on a long car trip. Federal Reserve officials are asking it about their drive to curb inflation.
Although willing to acknowledge progress in that battle, they are not yet ready to declare victory – or to announce an end to the successive increases that have pushed the Fed’s benchmark interest rate to its highest level in more than 20 years.
Speaking at the Kansas City Fed’s annual symposium in Woods Hole in August, Fed Chair Jerome Powell said the inflation fight remains “incomplete.” Although the inflation rate has been falling and the overheated labor market has cooled, he said, these positive signs “are only the beginning of what it will take to build confidence that inflation is moving sustainably toward our goal.”
Powell indicated that the Federal Open Market Committee (FOMC), the Fed’s policy-setting arm, may leave rates unchanged when it meets later this month, but he also made it clear that further rates hikes are possible later this year.
“There is substantial further ground to cover to get back to price stability,” he emphasized.
Employment Concerns
The labor market remains a source of concern. Employers added 187,000 workers to their payrolls in August – a far cry from the monthly average of 400,000 last year, but strong enough to support potentially inflationary wage gains and consumer spending levels.
Although the unemployment rate ticked up slightly – to 3.8 percent from 3.5 percent in July, it is close to a 50-year low; Although job openings declined to their lowest level in more than two years, they, too, remained well above pre-pandemic levels. And earnings continue to outpace inflation, a boon for consumers, but a challenge for the Fed as it attempts to orchestrate an economic “soft landing” by slowing economic growth enough to curb inflation without triggering a recession.
Wages are growing more slowly than they were last year, but the decline has been “achingly gradual,” Jonathan Millar, a senior U.S. economist at Barclays, told the Wall Street Journal. “We’ve not seen enough slowing.”
Fed officials feel the same way about the inflation rate. A cumulative total of 525 basis points in interest hikes have reduced the rate by more than half from its high of 9.1 percent a year ago. But the annual rate ticked up to 3.2 percent in July, keeping it above the Fed’s 2 percent inflation target.
Inflation Progress
But some economists think the inflation picture is brighter than the Fed acknowledges. The annual inflation rate averaged 2.1 percent for the three-month period from May through July, they note. And the core inflation rate – excluding volatile food and fuel prices - for that period fell to 2.9 percent – its lowest level since January, 2021. Adjusting for the lag in reporting rental costs, which have declined in recent months, Atlanta Fed President Rafael Bostic told the WSJ, “underlying inflation may well be close to our target already.”
Other inflation markers are less encouraging, however. Household spending increased by 0.8 percent in July from an upwardly revised 0.6 percent in June – the fastest rate in seven months. Gross Domestic Product – the key measure of economic growth – increased at an annual rate of 2.1 percent in the second quarter, adjusted downward from initial estimate of 2.4 percent, but still outstripping the 1.8 percent growth rate the Fed views as non-inflationary.
Home prices, a major inflation driver, continue to push that needle upward. After easing earlier this year, prices have rebounded, as limited inventories have offset the downward pressure from lagging demand. The closely watched S&P CoreLogic Case-Shiller index was flat year-over-year in June, but prices in all of the 20 top markets the index covered increased for the fourth consecutive month. “Half the cities in our sample now sit at all-time high prices,” Craig Lazarra, managing Director at S&P, reported.
The housing market story otherwise remains unchanged as mortgage rates (now topping 7 percent) and prices dent buyer affordability and scant inventories limit their choices.
Housing Unchanged
“Two factors are driving current sales activity—inventory availability and mortgage rates,” Lawrence Yun, chief economist for the National Association of Realtors (NAR) said in a recent commentary. “Unfortunately, both have been unfavorable to buyers.”
“Fading recession fears and the prospect of further home price increases have brought some house hunters off the sidelines,” Daryl Fairweather, chief economist for Redfin noted in a recent report. “But for the most part, buyers remain hesitant to jump into the market because their buying power is so much lower than it was a year ago.”
It’s still pretty much a seller’s market, most industry analysts agree, but only because there are so few listings available for the relatively few buyers competing for them.
Active listings declined by almost four percent in July compared with the previous month – falling almost 20 percent below the year ago level, Redfin reported -the largest decline in more than two years and the lowest level the company has ever reported.
“The conveyor belt of houses that come on and off the market is just grinding to a halt,” Sam Khater, chief economist at Freddie Mac, wrote recently.
The lower interest rates and lower home prices that would get that belt moving again don’t seem likely any time soon.
