Credit: Lou Barnes
Premier Mortgage Group
At its May meeting, the Fed was not as aggressive as feared, but rate hikes will continue, reinforced by unwinding the Fed’s portfolio of Treasuries and mortgage-backed securities.
Not Like the Past
This inflation is unlike previous inflationary cycles, so it will get easier treatment from the Fed and have different effects and outcomes. The difference, especially compared to the 1970s: instead of an overheated economy that is growing too fast with too much credit and incomes rising too fast, this episode has been caused by supply shortages.
The Treatment
Even though cost-pushed, the US and global economies must slow to contain prices. Interest rates will continue to rise, but much of this inflation will self-correct.
Housing
The housing market is upside-down. Supply is short, not overbuilt, and mortgages are tough to get, not too easy like they were in the past. Rates are already high enough to slow things down. Historically a two-point rise in inflation rates from the cyclical bottom does the trick. Today, we’re in the three-to-five-point range.
Energy
Inflation was rising before the Ukraine invasion, but the disruption in energy supply has made it worse. The good news is that supply and consumption are much more flexible than in the 1970s. Peace would bring some relief, but the adjustment is going to take a year or more.
Unemployment
Unemployment numbers are also upside-down. Normal inflation is a wage-price spiral, with wages leading the inflation. This time, wages are far behind inflation, oddly assisting the necessary slowdown. Unemployment is very low, due to a lack of available workers, and thus may not have to rise much for the market to see changes.
Supply chains
The end of the Cold War in 1990 opened the world to trade and pushed prices down. Over the next thirty years, global supply chains were optimized and tuned like a global orchestra. But then came the pandemic, war, and a resurgence of Covid across China… Re-tuning after all these factors will take another couple of years and likely will not be as tidy as before.
The risk of recession?
For now, it’s still only a “maybe.”
WK Real Estate is dedicated to you and your property search! Please, contact us today to see how we can help you.