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Toward the end of last year, there were predictions that the Federal Reserve would cut interest rates several times; the number six was floating around. But at the moment, with inflation proving to be more stubborn than expected, the market is only pricing in one rate cut in September, according to Apollo Global Management\u2019s chief economist, Torsten Slok.<\/p>\n
\u201cIt\u2019s quite a dramatic turnaround,\u201d Slok said<\/a> on CNBC yesterday.\u00a0<\/p>\n He mentioned Neel Kashkari, \u200b\u200bpresident of the Federal Reserve Bank of Minneapolis who yesterday said: \u201cMost people thought that we\u2019d be in a recession toward the end of last year\u2014that didn\u2019t happen. Instead we have very strong growth. U.S. consumers have remained remarkably resilient. The housing market has remained resilient. So I\u2019m not seeing the need to hurry and do rate cuts. I think we should take our time and get it right.\u201d\u00a0<\/p>\n But he didn\u2019t rule out interest rate hikes this year either.\u00a0<\/p>\n \u201cI don\u2019t think we should rule anything out at this point,\u201d Kashkari said, suggesting the country has the \u201cluxury\u201d of waiting to see where inflation will go before making any decisions regarding interest rates.<\/p>\n However, Slok doesn\u2019t expect rate hikes this year. Still, the fact that Kashkari even mentioned not ruling out interest rate increases shows inflation isn\u2019t \u201ccoming down to 2% as quickly as the Fed currently thinks,\u201d Slok said.\u00a0<\/p>\n And housing is a key part of that. \u201cLet\u2019s not forget that housing has a weight of roughly 35% to 40% of the CPI index, depending on how you measure it,\u201d Slok explained; the consumer price index is a measure of the average change over time in prices for goods and services. \u201cSo it means that housing is a really critical component for the Fed when they tried to achieve the 2% inflation target.\u201d When the Fed hits its 2% target and prices are deemed stable, it cuts interest rates; although it can make cuts before, too.<\/p>\n But as we already know, housing supply is very weak, in some areas more than others\u2014but demand is strong: People need homes. But \u201cthe textbook would have predicted that when mortgage rates go up in the range of 7% to 8%,\u201d demand would have softened, but because there is so little supply, it hasn\u2019t meaningfully. That\u2019s reflected in the latest Case-Shiller numbers, which measure the monthly change in single-family home values. The data shows home prices rose 6.5% in March from a year earlier. It also happened to be the ninth all-time high for home prices<\/a> in the past year. (Rents have flattened, but they\u2019re still high). Mortgage rates have fallen from their more than 20-year peak at slightly over 8%, but they\u2019re still substantially higher than those of the pandemic. As of the latest reading<\/a>, the average 30-year fixed mortgage rate came in at 7.34%.\u00a0<\/p>\n Housing \u201cstill is quite a significant risk, that it could put upward pressure on inflation over the coming quarters,\u201d Slok said, adding that Fed Chair Jerome Powell has been focusing on supercore inflation, which excludes food, energy, and housing, \u201cin an attempt to say, well, housing we can\u2019t really control. So let\u2019s try to take that out of the equation and remove that from the index.\u201d\u00a0<\/p>\n But in the last few months, other components have begun to re-accelerate, he said. \u201cThe tailwind to consumption, and in particular consumption services, is just really strong, and that\u2019s the challenge that supercore inflation has also been moving higher.\u201d<\/p>\n Housing is more challenging for the Fed to control because it can\u2019t necessarily build more homes, but it can attempt to control broader consumption, he said. Still, that\u2019s the challenge ahead for Powell and the powers that be. There are varying estimates on the number of homes we\u2019re missing, although all are in the millions. Powell has said it himself, that the current problems we\u2019re seeing in the housing market because of skyrocketing mortgage rates are short-term, while the real problem goes deeper.<\/p>\n \u00a0\u201cThe housing market is in a very challenging situation right now,\u201d Powell said<\/a> in early March. \u201cProblems associated with low-rate mortgage [lock-in] and high [mortgage] rates and all that, those will abate as the economy normalizes and as rates normalize,\u201d he said, referring to disconnect between homeowners with below market rates and the current offering that\u2019s somewhat led to existing home sales falling to their lowest point in almost three decades last year. \u201cBut we\u2019ll still be left with a housing market nationally, where there is a housing shortage.\u201d<\/p>\n<\/div>\nSubscribe to the CFO Daily newsletter to keep up with the trends, issues, and executives shaping corporate finance. Sign up<\/a> for free.<\/div>\n