{"id":1883,"date":"2023-10-18T17:23:08","date_gmt":"2023-10-18T17:23:08","guid":{"rendered":"https:\/\/connectwithfund.com\/economy\/opinion-stocks-and-homes-are-still-pricey-because-buyers-think-inflation-will-stay-high\/"},"modified":"2023-10-18T17:23:09","modified_gmt":"2023-10-18T17:23:09","slug":"opinion-stocks-and-homes-are-still-pricey-because-buyers-think-inflation-will-stay-high","status":"publish","type":"post","link":"https:\/\/connectwithfund.com\/?p=1883","title":{"rendered":"Opinion: Stocks and homes are still pricey because buyers think inflation will stay high"},"content":{"rendered":"
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\n \u201c<\/span> Fed Chairman Jerome Powell is essentially telling us that \u00a0monetary policy may work its wonders if we are just patient.\u201d<\/span>\n <\/p>\n<\/p><\/div>\n<\/p><\/div>\n

A Federal Reserve decision to\u00a0keep interest rates steady,\u00a0as the U.S. central bank seeks to\u00a0tame inflation while avoiding a\u00a0recession,\u00a0has support from\u00a0policy doves\u00a0like\u00a0Chicago Fed President Austan\u00a0Goolsbee. But following this path is risky.<\/p>\n

Higher U.S. interest rates would cast a damaging spotlight on the\u00a0federal government\u2019s ballooning borrowing and debt service \u2014 and the headaches it will bequeath the next\u00a0U.S. president.\u00a0This would create political pressures that recent Biden administration Fed appointees might prefer to avoid.<\/p>\n

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Moreover, the slow process of bringing down inflation risks that consumers\u2019 and investors\u2019 inflation expectations will remain well-above the Fed\u2019s 2% target. It also limits the Fed\u2019s flexibility for dealing with other challenges in the country\u2019s banking and financial systems.<\/p>\n

U.S. GDP growth should slow by the end of the year, after a strong third quarter.\u00a0Restarting student loan payments\u00a0is expected to drain $100 billion from consumer spending. The excess\u00a0savings households built up during the COVID shutdowns,\u00a0from government aid that has pumped up consumer spending, is finally running out.<\/p>\n

Overall, U.S.\u00a0recession fears have moderated\u00a0but\u00a0have not been extinguished. Year-over-year the\u00a0Consumer Price Index\u00a0is advancing at a 3.7% rate, but core inflation remains at 4.1%. Both are well-above the Fed\u2019s 2% goal.<\/p>\n

Fed Chairman Jerome Powell\u00a0told us inflation was transitory when prices began to surge\u00a0in 2021 and\u00a0delayed acting until President Joe Biden nominated him for a second term. Now Powell is essentially telling us that\u00a0monetary policy may work its wonders if we are just patient.<\/p>\n

In recent months, the\u00a0services component of core CPI has been much more important than goods. U.S. households stocked up on computers and desks during the pandemic shutdown and now revenge travel, concerts and hunting for homes and apartments \u2014 shelter is considered a service in the CPI \u2014 is the preoccupation.<\/p>\n

Shelter in the CPI is the rent on houses and apartments actually paid and the imputed rent on owner occupied houses, with former much affecting the latter. Shelter, in fact, totals 45% of the core CPI, and Powell has repeatedly pointed out that falling rents observed in industry surveys work their way into the CPI with a lag. So the dip of\u00a0last fall and winter in apartment rents\u00a0should have shown up in the CPI by now, but has not.<\/p>\n

Inflation expectations are hardening<\/h2>\n

It\u2019s no surprise inflation expectations are hardening. The year-ahead expected inflation among\u00a0consumers surveyed by the Conference Board\u00a0has barely budged over the past seven months, and is currently at 5.7%.<\/p>\n

The Fed is losing credibility with investors as well. Stock prices typically fall as the Fed raises interest rates. High-tech stocks are particularly hurt, because the present value of their future earnings declines if the cost of using money \u2014 interest earnings on forgone bonds \u2014 is rising.<\/p>\n

But if investors expect inflation to stay high, all of that goes out the window, because expected future profits will track up with prices. So as the Fed raised interest rates earlier this year,\u00a0stocks rallied \u2014 especially high-tech stocks.<\/p>\n

More behavioral evidence can be found in the market for new homes \u2014 existing homes are not turning over because too many homeowners have low-interest mortgages they don\u2019t want to give up. New home sales have been rising\u00a0despite\u00a0higher rates on mortgages. If you expect 4% or 5% inflation, those rates don\u2019t seem so steep.<\/p>\n

Commercial real estate in urban centers, meanwhile, has lost value as businesses need less space. Banks \u2014 especially regional banks with assets of less than $250 billion \u2014 have large shares of their assets tied up in commercial real estate loans, real estate investment trusts and various forms of collateralized debt. Many landlords can\u2019t sell buildings for what they owe and lack the collateral to refinance \u2014 no matter where the Fed sets interest rates.<\/p>\n

The same tale is playing out with the\u00a0debt\u00a0of less-than-stellar companies and consumer car loans. Raising rates enough to break consumer and investor inflation expectations won\u2019t much change those challenges, but prolonging the fight will limit the Fed\u2019s ability to intervene to stabilize banks \u2014 one way or another that requires printing money.<\/p>\n

Peter\u00a0Morici\u00a0is an economist and emeritus business professor at the University of Maryland, and a national columnist.<\/em><\/p>\n

More:<\/strong> It\u2019s a \u2018tale of two housing markets\u2019 with buyers and sellers at opposite ends, Fannie Mae CEO says<\/p>\n

Plus:<\/strong> How to take advantage of rising interest rates<\/p>\n<\/p><\/div>\n<\/div>\n

Read the full article here<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

\u201c Fed Chairman Jerome Powell is essentially telling us that \u00a0monetary policy may work its wonders if we are just patient.\u201d A Federal Reserve decision to\u00a0keep interest rates steady,\u00a0as the U.S. central bank seeks to\u00a0tame inflation while avoiding a\u00a0recession,\u00a0has support from\u00a0policy doves\u00a0like\u00a0Chicago Fed President Austan\u00a0Goolsbee. But following this path is risky. Higher U.S. interest rates would cast a damaging spotlight on the\u00a0federal government\u2019s ballooning borrowing and debt service \u2014 and the headaches it will bequeath the next\u00a0U.S. president.\u00a0This would create political pressures that recent Biden administration Fed appointees might prefer to avoid. 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