The Federal Reserve officials are facing a challenge as they monitor the receding inflation rates. One key final hurdle highlighted by Bank of America is the persistent high housing costs. Despite positive trends in recent months, shelter costs remain elevated and have prevented the Fed from being confident enough to reduce interest rates.
At the recent Federal Open Market Committee meeting, policymakers opted to keep the benchmark borrowing rate steady. While there has been some progress in inflation, the committee acknowledged that more confidence is needed before considering a rate cut. Bank of America economist Michael Gapen emphasizes that shelter inflation has been consistently high this year, making it difficult for the Fed to make a move.
In addition to housing costs, services prices excluding housing have also seen a significant rise. With a 4.7% increase on a 12-month basis in May, this pace is well above the Fed’s 2% target. The “sticky” nature of shelter inflation at 5.4% year-over-year level further complicates the situation.
Gapen suggests that it may take several more months before the Fed gains the confidence needed to implement rate cuts. He predicts that a decline in shelter inflation could pave the way for the Fed to make its first and possibly only rate cut later in the year. However, the Fed does not solely rely on CPI readings for its monetary policy decisions but considers a broader range of factors.
Fed Chair Jerome Powell has emphasized that housing is just one factor in the Fed’s decision-making process. Powell clarified that the Fed does not target housing prices specifically but looks at the overall inflation trends. The “super core” measure, which excludes housing, food, and energy, has remained relatively stable at 2.1% year-over-year.
Philadelphia Fed President Patrick Harker expressed concerns about the prolonged high shelter inflation. Harker stated that consistent positive data over several months would be necessary to convince him of the need for a rate cut later in the year.
The Federal Reserve is closely monitoring inflation trends, particularly the persistent high housing costs. While there have been positive developments, more confidence is needed before considering any rate cuts. The Fed’s decision will be influenced by a combination of factors, not solely focused on housing prices. As economists and policymakers continue to assess the economic landscape, a cautious approach is warranted to ensure monetary policy decisions are well-informed and aligned with the Fed’s goals.