Contradictory messages from the Fed Chair. But maybe a corner being turned?

With June’s CPI report looming for (Thursday), the head of the US’s central bank was at the Capitol giving his breakdown of where things stand. And on Tuesday, he seemed determined to stay on the Fed’s current course, no matter how much it hampers some people.

Aspiring homeowners in the U.S. face one of the most challenging periods to buy a home. Home prices are at a record high and mortgage rates are over 7%.

And there is no respite for the time being. Federal Reserve Chair Jerome Powell told Congress on Tuesday that he was committed to keeping interest rates high enough to fight inflation in the broader U.S economy.

“There’s no question that higher interest rates are making it harder to buy homes in the short term,” Powell said. “But in the longer term, this is the best thing, particularly for younger people who are not yet in the housing market.”

via GIPHY

Oh? Comfortable Acela corridor bankers know that prospective homeowners should be prevented from being able to afford a house, because they need to take this yucky medicine? That’s the “problem” that needs to be solved?

I’d argue that higher interest rates are a big reason why homes continue to be unaffordable for many Americans. Few home owners will want to sell their current homes when there’s a lot more risk and cost in having to live in another home. As I’ve said before, my wife and I have a 3% interest rate on a lower-cost mortgage. Why would I look for another house, pay more, and have to pay 7% on money that we borrow?

Powell went on to claim that keeping the higher rates will continue to bring the housing market and other prices into balance.

The goal of higher rates is to “get back to 2% inflation for the whole economy,” Powell added, “so that the housing market can be on a better foundation.”

Hence, higher rates are “the absolute best thing we can do for the housing market and for the economy [so as] to sustainably bring inflation back down, so that people aren’t talking about it anymore,” he stated.

Again, the housing affordability issue is a SUPPLY PROBLEM, and that’s largely due to people not being willing to put their existing homes on the market because it means they stop reaping the benefits from a lower, locked-in interest rate. We've also seen a leveling off in home construction in recent months, as the higher rates may be making people back off from building more.

I don’t see how a lower amount of consumer inflation for food, gasoline, or other everyday items would do anything to change that reality (and it may make it worse if “lower inflation” also means lower wage gains).

There’s another reason that Powell’s comment about how lower inflation lets the “housing market [be] on a better foundation.” is a really bad take. When the casual person thinks “inflation”, they often are thinking “these things cost more than it used to”. And they care if that higher costconstrains them from doing what they want…especially when it comes to major purchases like a home or a car.

While I think inflation talk is intentionally overblown for political reasons, an arbitrary difference of 1% in CPI between 2% and 3% isn’t going to stop people from being frustrated with the cost of certain things.

What will make them feel better is the ability to make more money and opportunity at their jobs, and being able to afford houses and jobs. And keeping interest rates at a 23-year high is making it more difficult to be able to do so, while also handcuffing earlier owners of homes and autos from moving on from the low interest rate they are currently enjoying on their asset.

That might not be what they teach in the econ books, but I sure think that applies to our situation in the Summer of 2024. And the Federal Reserve needs to deal with that reality sooner than later, and get rates down to a more reasonable level. If not, the current annoyance over higher prices will be made worse if an economy that currently is only in “decent growth” mode downshifts further, and the slowdown in spending and job growth starts to become outright cutbacks.

But then today, Powell seemed to admit that maybe jobs and economic growth are important.

“I think for a long time, we've had to focus heavily on the inflation mandate," Powell told House lawmakers, referring to one side of the central bank's dual charge to maintain both stable prices and maximum employment. "But I think now we're getting to the place where the labor market is getting pretty much in balance to where it needs to be, and so we're looking at both sides.”…

Powell's acknowledgment of those risks in the labor market is a sign to Fed watchers that a rate cut is nearing, perhaps as early as September.

Yet the central bank head stopped short Wednesday of being specific about when any cuts could begin, making it clear that more data about cooling inflation is still needed.

Powell said he has some confidence that inflation is on its way down to target, but it’s more a question now of whether the central bank is sufficiently confident inflation is coming back to the goal of 2%.

And Wall Street ran with that admission of reality from the Fed Chair, with most of today's big gain happening in the final hour of trading after Powell’s comments to Congress.

Powell’s closer attention to cooling job market boosts hopes for Fed rate cuts https://t.co/EXaXr5FWZa by @Jenniferisms

— Yahoo Finance (@YahooFinance) July 10, 2024

The S&P 500 (^GSPC) rose 1% for a 37th record close this year, breaching 5,600 for the first time. The Dow Jones Industrial Average (^DJI) jumped 1.1%, while the tech-heavy Nasdaq Composite (^IXIC) gained 1.2%. The S&P and Nasdaq were each higher for the seventh straight session.

Tech's biggest names continued to rise, powering the gains of the broader market. The AI darling Nvidia (NVDA) advanced more than 2%, while Apple, (AAPL), Microsoft (MSFT), and Google (GOOG, GOOGL) each gained more than 1%.

Bets on interest rate cuts have helped keep stocks roaring as signs of slowing in the US economy pile up.

Wall Street also looked to Washington for more optimism. In his semiannual testimony to Congress, Powell hinted the stage is almost set for lowering interest rates from two-decade highs, pointing to a cooling in inflation and in the jobs market. He also cautioned that keeping rates elevated for too long could weaken the economy, giving hope to rate-cut-hungry investors.

But a key test for stocks and rate-easing prospects lies ahead in the crucial consumer inflation report due Thursday. While a cooler reading will cement the likelihood of a Fed policy shift in September, a too-cool print could revive concerns about a recession and the labor market.

Oh, now we don’t want inflation in the June CPI because it might mean recession? You just can't win with some people.