Source: Golden Ten Data
Apollo's chief economist pointed out that there is still an upward risk of US inflation, but the Federal Reserve is unlikely to raise interest rates during the year.
At the end of last year, some predicted that the Federal Reserve would cut interest rates six times. However, currently, since inflation is more stubborn than expected, the market only thinks that the Federal Reserve will cut interest rates once this year in September. Torsten Slok, chief economist at Apollo Global Management (Apollo Global Management), believes this is a dramatic shift.
He mentioned what Minneapolis Federal Reserve Chairman Kashkari said on Tuesday. The latter said at the time, “Most people thought we would fall into recession at the end of last year, but that's not true. On the contrary, we have had very strong growth. American consumers are still amazingly resilient. The real estate market has remained resilient. Therefore, I don't think there is any need to rush to cut interest rates. I think we should take it slow and get things done.”
Furthermore, Kashkari did not rule out the possibility of raising interest rates this year. “I don't think we should rule out any possibility now; the Fed can luxuriantly wait for the direction of inflation before making any decisions about interest rates.
However, Slok does not expect the Federal Reserve to raise interest rates this year. However, he said that the fact that Kashkari did not rule out the possibility of interest rate hikes shows that inflation will not “fall to 2% as quickly as the Federal Reserve currently believes.”
Housing is a key part of the CPI data. Slok explained, “Let's not forget that housing weighs about 35% to 40% in the CPI index, so this means that housing is a very critical component when the Federal Reserve is trying to meet the 2% inflation target.” When the Federal Reserve reaches the 2% target and believes that prices have stabilized, it will cut interest rates, although it can cut interest rates until then.
He added, however, that as the market already knows, the housing supply is very weak, and in some regions it is even worse, while demand is so strong that people need housing. However, “textbooks predict that when mortgage interest rates rise to the 7% to 8% range, demand will weaken, but demand has not declined significantly because supply is too low. The latest Case-Shiller data reflects this.”
This data measures monthly changes in single-family home values. According to the data, housing prices in the US rose 6.5% in March compared to the same period last year. This is also the ninth record high for housing prices last year. Mortgage interest rates have declined from a peak of slightly above 8% in more than 20 years, but they are still far higher than during the Great Depression. According to the latest data, the average interest rate for a 30-year fixed mortgage is 7.34%.
Housing “remains a significant risk, and it could put upward pressure on inflation over the next few quarters,” Slok said. He added that Federal Reserve Chairman Jero Powell has been watching supercore inflation, which does not include food, energy, and housing. In response, Slok said, “Powell seems to be saying, 'We can't really control housing. So let's try removing it from the index'.”
But in the past few months, other segments of inflation have begun to grow at an accelerated pace. Slok pointed out, “In particular, the downturn in service consumption is very strong, which is why supercore inflation is also rising.”
He said that for the Federal Reserve, controlling the housing market is more challenging because it can't necessarily build more houses, but it can try to control broader consumption. Still, this is a challenge facing Powell and those in power. Powell himself said that due to soaring mortgage interest rates, the current problems the market sees in the real estate market are short-term, but the real problems are even more serious.
Powell said in early March, “The real estate market is currently in a very challenging situation. He said, “With the normalization of the economy and normalization of interest rates, the problems associated with low-interest fixed mortgages and high mortgage interest rates will lessen.” He was referring to the disconnect between homeowners with lower than market interest rates and current listings. To a certain extent, this disconnect caused sales of existing homes to fall to their lowest point in nearly 30 years last year. “But across the country, we still have a housing shortage.”
edit/lambor