Powell Acknowledges Putting Pressure On Housing While Teeing Up Rate Cut


The chair of the Federal Reserve acknowledges that their tightening policies to bring down inflation have affected the housing market, and he is offering a glimmer of hope for analysts who expect a rate cut within the next few months.

Jerome Powell testified before the Senate Banking, Housing and Urban Affairs Committee on Tuesday where he talked about the Fed’s semiannual Monetary Policy Report, which details the state of the U.S. economy.

Powell was peppered with housing questions by Sen. Jon Tester, a Democrat from Montana.

“Regardless of where I go in the state of Montana, housing is a big issue,” Tester said.

“Larger towns, the medium-sized towns, to small towns, housing is a huge issue. And I think it’s a huge issue all over the country – you can correct me if I am not correct in that – and I was wondering how the housing challenges fit into the overall economic picture that you are seeing.”

Powell said he agrees there are significant housing issues all over the country, which preceded the Covid pandemic.

“Certainly, the pandemic has created new distortions and monetary policy works through interest-sensitive spending. There is no more interest-sensitive spending than buying a house and having a mortgage,” Powell said.

“For sure, monetary policy is having an effect on economic activity in the housing sector. But I would also say, the best thing we can do for housing is to succeed in getting inflation down to 2% on a sustainable basis so rates can come down, so the housing market can get back to what was the pre-pandemic normal, which is to say, still a housing shortage, but not dealing with the kinds of specific things we’re dealing with now.”

Tester said from an economic growth standpoint, there are small businesses, schools, hospitals, and main street businesses that can’t hire people and they can’t expand because there is no place for employees to live. He asked how that fits into the Fed’s economic outlook metrics.

Powell said policies to increase housing supply are not in the hands of the Fed, but rather the responsibility of state and federal legislators.

Tester asked if incentives that resulted in more affordable workforce housing were successful if that could have a positive impact on the economy.

“These are questions for you, but I would say this, that I’m aware housing is in short supply and that for many, it’s a critical need for the workforce, and so more of it is better but to as where the fiscal policies, how you should prioritize that, that’s not up to us,” Powell said.

During his opening statement to the committee, Powell said inflation has eased notably even though it remains above the Federal Open Market Committee’s goal of 2%.

“After a lack of progress toward our 2% inflation objective in the early part of this year, the most recent monthly readings have shown modest further progress. Longer-term inflation expectations appear to remain well-anchored as reflected in a broad range of surveys of households, businesses, and forecasters, as well as measures from financial markets,” Powell said.

Powell said more good data would strengthen their confidence in a soft landing. He added that reducing policy restraint too late or by too little could unduly weaken economic activity and employment.

Although Powell said he would not be sending any signals about future actions by the FOMC, analysts said his remarks show they are opening the door to rate cuts in the coming months.

“It appears as if the foundation is being laid for a pivot in September,” Christopher Hodge, chief economist for the U.S. at Natixis in New York, told Reuters.

CME FedWatch currently projects a 70% chance the federal funds rate will be cut in September.

Although the Feds do not control mortgage rates, they heavily influence them, and this could be the news that is needed to simultaneously brings down interest rates for homes.

Powell will testify on Wednesday before the House Financial Services Committee. The FOMC is scheduled to meet on July 30 and 31.

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