Bank of America noted that with so many signs showing that inflation is easing, Fed officials will spend at least part of their summer looking for one last major hurdle to clear. Housing costs were at the center of an inflation picture that irritated policymakers, who expected rents and rents to start falling. Instead, sheltering costs have remained high and the Fed has been denied sufficient confidence to cut interest rates, despite encouraging trends in the past two months. “The inflation reports in April and May are welcome and unambiguously good news after the three undeniably bad inflation prints at the start of the year,” Michael Gapen, an economist at Bank of America, said in a recent note. “However, a change in Fed policy will require more than one or two good reports.” After the Federal Open Market Committee, or FOMC, meeting last week, policymakers decided to keep the key overnight borrowing rate at a range of 5.25% to 5.5%. In its statement after the meeting, the committee noted “modest additional progress” on inflation but noted that members were still waiting for “greater confidence” that inflation is moving toward the Fed's 2% target before they cut interest rates. Jabin noted that housing inflation rose at a rate of 0.4% per month this year as measured by the Consumer Price Index. He added that prices for services excluding housing rose 4.7% on a 12-month basis in May, a pace inconsistent with the Fed's 2% target. With housing inflation “steady” at 5.4% year-on-year, Jabin said it could take months before “greater confidence” is achieved. “We think the Fed is unlikely to achieve the confidence it needs to initiate interest rate cuts until housing inflation declines another step,” he said. “This has happened in our forecasts starting in August, and the Fed could see three of these readings before the December meeting, when we think it will implement its first — and only — rate cut of the year. The Fed certainly does not. Uses readings The CPI as a guide for monetary policy, instead, is based primarily on the Commerce Department's measure of personal consumption expenditures prices, a less housing-dependent index Monthly inflation readings in the PCE measure have been running at either 0.5% or 0.4% since March 2023. More importantly for the Fed, the “super core” measure that excludes food, energy and housing services was at a low rate, rising just 2.1% from last year. Chairman Jerome Powell, in his post-meeting news conference on Wednesday, noted that Housing is just one input into how the Fed's policy moves forward: “We don't look at any one price in any sector and say, 'This is the price.' “We don't target housing prices, for example,” Powell said. “Any price that contributes to sustained inflation will be important.” Any price that contributes to continued decline in inflation will also be important, but I wouldn’t single out housing as having a special role there. But Gabin said the decline in housing inflation could serve as an important sign for the Fed as it looks to see Philadelphia Fed President Patrick Harker, who is not a voter on the Federal Open Market Committee this year, noted on Tuesday the “stubbornness of housing inflation on… “Long term” He said several months of good data would convince him to cut interest rates later this year.
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Housing inflation will need to fall before the Fed can consider lowering interest rates
