Michelle ThompsonFollowing another impressive jobs report that showcased the strength of America’s labor market, the Federal Reserve now has a clear path to gently guide the economy to a figurative soft landing. However, despite the smooth transition, challenges await at the destination.
The US economy is poised for a “soft landing,” with inflation easing to the Federal Reserve’s 2% target in a sustainable manner without causing significant job losses. Yet, Americans continue to face economic obstacles that intensified with the surge in inflation in 2021, particularly in the housing market, which is currently near its least affordable point in decades.
In the days leading up to the Fed’s decision to maintain interest rates at a 23-year high, Democratic US senators criticized the central bank for its role in America’s housing challenges. While the Fed’s decisions influence mortgage rates, its primary mandates are to stabilize prices and maximize employment, rather than ensuring housing affordability. The latter is also hindered by a limited housing supply.
Congressional measures, such as tax credits for first-time homebuyers or the removal of government red tape, could prove more effective in addressing America’s affordability crisis than the Fed simply lowering rates. In 2021, when the Fed’s key interest rate was near zero, home-price growth surged at a historically high double-digit pace, as reported by the S&P CoreLogic Case-Shiller National Home Price Index.
Pedestrians stroll in the vicinity of the Marriner S. Eccles Federal Reserve building in Washington, DC, USA, captured on Thursday, December 28, 2023.
Currently, housing is beyond the financial reach of many individuals, particularly young Americans and those with lower incomes.
A soft landing would entail a stable labor market and the potential for further easing of interest rates. However, the challenge of inadequate housing supply varies by region and is influenced by local zoning laws and innovative policy approaches.
While higher incomes and slightly lower mortgage rates have improved conditions, affordability is expected to remain a challenge for an extended period, according to Orphe Divounguy, a senior economist at Zillow.
Although the average 30-year fixed mortgage rate reached 7.79% in late October, the highest level in over two decades, it has gradually decreased to 6.63% last week. This trend has positively impacted buyer and seller sentiment, as indicated by Fannie Mae surveys. However, Divounguy predicts that the average 30-year fixed mortgage rate will likely not fall below 6% this year.
It’s crucial to consider home prices, which remain elevated nationwide. Data from the National Association of Realtors reveals that the median home sale price in 2023 was $389,800, marking a 1% increase from 2022 and setting a record high. Economists suggest that home prices may not see a significant change in the short term. Daryl Fairweather, Chief Economist at Redfin, emphasizes that making it easier to build housing is a sustainable solution to address affordability challenges, as falling mortgage rates often lead to increased demand and higher prices due to competition for a limited number of homes. The key is facilitating the construction of new homes to achieve long-term affordability.
Trump has expressed that he would not reappoint Jerome Powell as the Chair of the Federal Reserve.
Former President Donald Trump has stated that if he is reelected, he would not reappoint Federal Reserve Chair Jerome Powell. Trump accuses Powell of considering rate cuts to favor Democrats in the 2024 elections. In an interview with Fox Business Network’s Maria Bartiromo, Trump expressed his belief that Powell might lower interest rates to support Democrats, potentially helping them in the elections. While Powell mentioned the possibility of rate cuts to address inflation, he indicated that such cuts may not occur until later in the year. Trump accused Powell of being “political” and suggested that he has other choices for the next Fed chair, though he did not disclose names. Powell, reappointed by President Joe Biden in 2021, has faced criticism from Trump throughout his tenure. Despite Trump’s accusations, Powell has emphasized the Fed’s commitment to its dual mandate of job growth and inflation control.
What’s coming next?
Monday: McDonald’s, Caterpillar, Estee Lauder, and Tyson Foods report earnings. S&P Global and the Institute for Supply Management release January surveys assessing the US services sector. Atlanta Fed President Raphael Bostic delivers remarks.
Tuesday: Earnings reports from Eli Lilly, Toyota, UBS AG, Chipotle, Ford, Snap, and CAVA. Cleveland Fed President Loretta Mester delivers remarks.
Wednesday: Walt Disney, Uber, CVS, PayPal, Yum! Brands, Fox, The Carlyle Group, U-Haul, News Corporation, New York Times Company, Mattel, and Spirit Airlines announce earnings. The US Commerce Department releases December data on exports and imports. Fed officials Adriana Kugler, Thomas Barkin, and Michelle Bowman deliver remarks. China’s National Bureau of Statistics releases January inflation data.
Thursday: Earnings from S&P Global, ConocoPhillips, Unilever, Duke Energy, Pinterest, Expedia Group, Warner Music Group, Ralph Lauren, Tenet Healthcare, Under Armour, and Yelp. Richmond Fed President Thomas Barkin delivers remarks.
Friday: Earnings reports from Pepsico and Honda.
Emily Martinez
