As the second quarter comes to an end, all eyes are once again on the FED. Although we have gotten some relief from inflation, it still remains stubbornly high. As a result costs of everything continues to remain elevated. This has become very apparent when it comes to housing costs and the cost of every other consumer item including the cost of borrowing.
Time will tell how quickly the economy begins to cool and inflation begins to fall to the Fed target level of 2%. Until then, rates will remain elevated. The yield curve however remains inverted and should continue to be until we see clear evidence of a recession. At that time, the FED will begin reducing rates to a more normal level. At the time of this writing,
It is important to note that the headline CPI (Consumer Price Index) has dropped from 4.9% to 4.0% year over year. Meanwhile, the year over year “Core” CPI has dropped from 5.5% to 5.2%. This is a very good sign that inflation is beginning to come down. This will be welcome news to anyone living on a fixed income. We have clearly seen the destructive impact that inflation can have on the economy. Hopefully, we are on track to get it under control.
Meanwhile I expect housing prices to remain high and sales of homes to remain slow. Much of the slowness in home sales is due to the cost of building new houses, the limited supply in the market, and the level of mortgage interest rates. It is also important to note the impact that home turnover is having in the market today. Fewer people are selling their existing home because they have a low fixed interest rate locked in today and do not want to pay that off and buy a new home at the current interest rates. Once the economy slows and interest rates return to more normal levels you can expect more home sales activity. Meanwhile, the high building costs and higher interest rates will keep many buyers on the sidelines.
It is important to keep in mind that “inflation adjusted” wages are measured by comparing wage growth to inflation. We now have seen 26 consecutive months of negative inflation adjusted wage growth. All too often we see inflation as a good thing if it raises our asset values, but in the end, it also destroys our buying power because dollars are worth less. Higher interest rates are the FED’s tool to slow growth, and lower interest rates are used by the FED to encourage growth.
I am encouraged that the rapid uptick in interest rates will have the effect that they were intended to do and we will indeed see rates top out as we move through the summer. It is certainly possible to see the FED reverse course next year. Meanwhile, we will wait and see.
As always, I want to thank you for trusting us to be your bank of choice. If you have any questions or concerns, feel free to reach out to us at any time.
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