Popular Economics Weekly
Rather than worry about too much inflation still in the pipeline, we should worry about too little economic growth going forward, if we take Chairman Powell at his word in his latest speech at a recent economic forum the Fed should keep their rates high enough that economic growth should be in the 2 percent range to achieve the Fed’s target inflation rate of 2 percent inflation.
But Realtors are loudly crying that holding interest rates at the current high level is destroying the housing market.
Remarking on the fact that existing-home sales are now at the lowest level since the Great Recession, NAR chief economist Lawrence Yun said ,
"As has been the case throughout this year, limited inventory and low housing affordability continue to hamper home sales. The Federal Reserve simply cannot keep raising interest rates in light of softening inflation and weakening job gains."
Chairmen Powell’s truism wasn’t always the case. A look at the below FRED graph dating from 1950, shows economic growth was ‘held’ in the 2 percent range only after 1980 and former Fed Chairman Paul Volcker’s era of setting sky high interest rates until the sky high inflation originating in the 1970s was tamed (gray bars are recessions).
But to accomplish it, Volcker’s Federal Reserve believed a massive transfer of wealth from salaried workers to owners of capital (shareholders and corporate CEOs in the main) was necessary. Why? Volcker’s Federal Reserve believed that the economy couldn’t tolerate an inflation rate with average hourly wages rising much more than 2 percent per year.
This was obviously an overreaction to the 1970s wage-price spiral. Yet prior to 1980 quarterly GDP growth averaged closer to 5 percent, and there was a much more equal distribution of income between employees and employers.
The Fed under Volcker’s successor, Alan Greenspan, had done such a good job of tamping down wage increases that too low inflation was the worry in 2009 after the busted housing bubble and Great Recession. It was the reason his successor, Ben Bernanke, instituted the Quantitative Easing (QE) policies that injected enough money into the system to bring the inflation rate back to its 2 percent target.
Existing-home sales faded in September, according to the National Association of REALTORS®. Among the four major U.S. regions, sales rose in the Northeast but receded in the Midwest, South and West. All four regions registered year-over-year sales declines.
A record number of multi-family units (apartments) are under construction, as there are now a record number of Americans needing some kind of housing, and more apartments might create more affordable rents.
But it won’t satisfy those still holding the American dream of owning their own home. "For the third straight month, home prices are up from a year ago, confirming the pressing need for more housing supply," Yun said.
Now is not a good time for the Fed to continue to restrict credit. We need higher economic growth more than ever with so much geopolitical uncertainty, and a poor housing market.
Harlan Green © 2023
Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen
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