Powell’s and Flores’ enthusiasm for raising rates to reduce a type of inflation once thought to be only a transitory, supply-driven phenomenon also has support from economic pundits.
Gerard DiPippo, senior fellow in the economics program at the Center for Strategic and International Studies, welcomes Powell’s aggressive monetary policy action.
“Inflation affects everyone, but measures to contain inflation, such as higher interest rates, disproportionately affect a smaller group of people,” he said. Lower-income workers whose jobs are more temporary are usually the first to feel the pain, he says.
AutoZone salesman Gabriel Salazar says he’s comfortable with higher rates because he’s paid off his house, doesn’t have a credit card and uses cash, but it’s the work that matters. “I will not be affected by high rates as long as I am still employed.”
Forecasts point to a recession
The Fed’s forecast for job losses may not look harsh, with the estimated unemployment rate rising to 4.1% in 2024 from its current level of 3.6%. Barely any blood in the streets.
However, Macquarie economics chief David Doyle said the Fed’s jobless forecast points to rapid job losses that could mean a technical recession. “Although the Fed does not explicitly call for a recession, elements of its forecast are consistent with it,” he said.
The Fed’s forecast of a 0.5 percentage point rise in unemployment over two years would mean, based on historical comparisons, that a recession is on the way.
“We note that the unemployment rate has never risen by this magnitude without a recession shortly thereafter,” Doyle said.
“During each of the three ‘soft landing’ periods (1965, 1984 and 1994) that Powell mentioned in a speech earlier this year, the biggest increases in the unemployment rate were just 0, 2 to 0.3 percentage points.”
The construction industry is one of the first places where jobs usually disappear. Morgan Stanley’s chief US economist, Ellen Zentner, points out that housing is already weakening as pressure from higher rates becomes more evident.
“Affordability issues and rising mortgage rates have significantly reduced demand for housing,” she says.
“As mortgage rates for a 30-year fixed mortgage hit a high of 5.97% in June – the highest level since October 2008 – sales of new, pending and existing homes all fell in the market. Our housing strategists are looking for further weakness through 2022 and 2023.”
On the ground, the turn is already noticeable. The vice-president of Silicon Valley property group Compass, David Barca, said that while 30-year fixed mortgage rates protect the market more than Australian short-term loans, property sales are already starting to feel the effects.
He says year-over-year sales were down 20% in San Francisco, while inventory rose slightly, but not enough to move from a seller’s market to a buyer’s market.
“Price discounts are growing 50% year over year to about 19% of all listings in California,” he says. “For me, the merging of higher interest rates, inflation, along with the falling stock market and crypto – the huge media concentration has created worry, insecurity, even fear with our pool of buyers.
“My personal feeling is that it will become more pronounced in the short term, but the market will adjust. After all, we’ve only had interest rates below 6% since 2009, and the extremely low rates below 3 % were largely an antidote to the pandemic.
Housing market signals
For Powell, the housing market will be one of the most important signals of an impending recession due to what is called the wealth effect – where people spend more or less depending on their wealth.
“We’re well aware that mortgage rates have gone up a lot and the housing market is changing,” he says.
“We are watching him to see what will happen. How much will this really affect residential investment? Not really sure. How will this affect house prices? Not really sure. We are monitoring this very carefully.
Total home equity in the United States rose nearly 20% in the first quarter of this year to a record high of $27.8 trillion ($39.6 trillion), according to the Federal Reserve. It should make people feel rich. The problem is that their 401(k) retirement accounts, which are typically heavily invested in stocks, have been hit hard.
DiPippo thinks Americans are more likely to look at their 401(k) more than the value of the house.
Of course, there will be some people, like Oscar Macias, a retired mechanic turned Uber driver from San Diego, who has paid off their house, has no dependents, and could benefit from higher interest on their accounts. banking.
“I think I’ll probably spend more on my vacation,” he says.
While spending on goods may have fallen, spending on services such as flights, football games and hairdressers has increased significantly, according to credit data from Mastercard and Visa.
And people like Macias might even now find that their trips abroad are about to become more enjoyable due to the strengthening US dollar.
Higher interest rates have the magical effect of increasing the value of the US dollar, which not only makes overseas travel cheaper, but also imports, and helps reduce inflation.
Internationally, higher interest rates in the United States mean a stronger currency because investors look at the interest, or yield, they get from bonds and other investments when deciding where to put their money. .
DiPippo notes that the rise in the value of the greenback can also hurt. Exporters may find that their goods and services are more expensive compared to other countries, whose currencies are cheaper.
And developing countries may find that their US dollar-denominated debts begin to grow because interest rates are higher and they are more expensive to repay.
For now, however, as employment in particular remains robust, many Americans appear to be accepting higher interest rates in their stride. But if the recession hits, they may not be so indifferent.