Experts on Fed rate hike's effect on housing, wages, and more

As the Federal Reserve announced its largest interest rate hike since 1994 this week, economic analysts who spoke with the MDJ said the move should, on balance, ease the economic burdens on families.

The three-quarter of a percentage point increase was aimed as an aggressive move to tamp down runaway inflation, with Chairman Jerome Powell and colleagues signaling more increases would be coming this year.

Though the increase could have plenty of negative side effects — a halt in the steady wage increases of the last two years, a possible nationwide recession — Tom Smith, a finance professor at Emory University, argued the risks are worth it.

“These kinds of policies, as painful as they are, are aimed at slowing down the consumption that is pushing prices up,” Smith said Thursday. “What’s worse? Dying of a heart attack, or getting up at 6 a.m. and working out every morning? ... This is the Fed making the economy take its medicine.”

Smith said Powell and colleagues are opting for the latter option. Kennesaw State University’s Roger Tutterow agreed with that assessment.

“For large parts of our population, they have no way to avoid buying the products that are rising in price and, actually, a lot of the price inflation is in food and energy. So an 8% inflation (rate) acts as a tax on the buying power of households, particularly those individuals who are on fixed incomes,” Tutterow said.

Indeed, Powell’s press conference kicked off with the message that bringing down inflation is the primary driver of the rate increase. But, as the chair went on to indicate, the increase could have significant ramifications for other sectors, including the hot housing market.

What those effects could be, Powell added, isn’t yet clear.

“How much will it really affect residential investment? Not really sure. How much will it affect housing prices? Not really sure,” he said, noting the supply of housing stock remains “incredibly low.”

Smith is of the opinion the increase “is definitely going to cool things down, and my guess is that the (first rate increase announced earlier this month) probably already started to cool things down, but it’s definitely going to cool down now.”

Added Tutterow, “You are already seeing the housing demand moderate, and I expect appreciation on housing is going to slow down relatively quickly.”

Most homeowners won’t see an immediate change, given that they generally hold fixed-rate mortgages on their houses (the same goes for federal student loan borrowers). But for those who continue to buy, they can expect mortgage rates to rise, as they already have recently, Tutterow said.

The Federal Reserve’s move only directly changes the federal funds rate, the rate at which banks borrow and lend to one another. Other consumer rates — i.e., mortgages and credit cards — will follow suit.

For workers, Powell maintained the goal of the rate increase isn’t intended to drive down wages or increase unemployment, saying rising pay isn’t the driving force behind inflation. But Smith indicated the Fed’s limited toolkit can’t always avoid those side effects.

“The Fed doesn’t have — there’s no mechanism in the economy, to say, ‘Oh, if we do this thing, it’s going to impact wage inflation, but not the inflation of housing.’ … The policies are way too generic to be able to, let’s say, fine tune them,” Smith said.

The ultimate risk from that lack of precise tools is economic recession, which Smith said the country may already be in. Already, as rates increase, incentives will go up for families and individuals to save rather than spend.

“Because inflation got so high, so quick, it’s going to be a challenge to the Fed to engineer a soft landing — that is an outcome where they lower inflation without causing a recession,” said Tutterow.

“I think that you may see the Fed err on the side of getting inflation under control, even if it significantly slows the economy. Certainly, that’s not the goal. I don’t think the Fed’s going into this thing and saying, ‘We need to create a recession so inflation will come down.’ They will try to have it both ways. It’s just going to be a very tough balancing act.”