Federal Reserve Chair Jerome Powell sent a stark message to markets following the decision to hike rates by another 75 basis points, with the central bank chief telling reporters that there’s no “painless” way to bring down inflation and warning there could be more than just a “relatively modest” rise in unemployment as the Fed tightens aggressively to dent demand.
The central bank head said that inflation was “running too high” and warned that rates are heading higher and poised to stay at a restrictive level for “some time.”
‘Forceful and Rapid Steps’ To Quell InflationPowell said at the press conference that the Fed is taking “forceful and rapid steps” to bring down demand in the U.S. economy, which has been the dominant factor behind soaring inflation.
Powell vowed to erode demand to bring it into balance with supply, which has been constrained by various factors, including geopolitical conflicts and the rejigging of supply chains as de-globalization grinds ahead.
The Fed chief also noted that bringing inflation down to the central bank’s 2 percent target would likely require a “sustained period of below-trend growth” and that there would “very likely be some softening of labor market conditions.”
He added that a soft landing will be “very challenging” and that failing to quell inflation and restore price stability is not an option as that would mean “far greater pain later on.”
Economic Gloom DeepensAs the Fed embarked on its rate-tightening cycle, the housing market has shown growing signs of cooling.
“The housing sector is the most sensitive to and experiences the most immediate impacts from the Federal Reserve’s interest rate policy changes,” NAR Chief Economist Lawrence Yun said in a statement. “The softness in home sales reflects this year’s escalating mortgage rates.”
“As with the swings in rates and other uncertainties around the housing market and broader economy, mortgage applications increased for the first time in six weeks but remained well below last year’s levels, with purchase applications 30 percent lower and refinance activity down 83 percent," Joel Kan, MBA’s Associate Vice President of Economic and Industry Forecasting, said in a statement.
The 30-year fixed mortgage rose to 6.25 percent last week, according to the MBA, which is the highest level since 2008.
Homebuilder optimism has dropped sharply, with Gregory Daco, chief economist at Ernst & Young, saying in a statement that the survey “points to a housing recession in September.”
The Zillow Home Value index has recorded its second consecutive monthly drop, with nearly a quarter of homes for sale experiencing a price drop in August, the highest since 2012.
Besides evidence of a slowdown in the housing market, other economic indicators have been flashing warning signs.
‘Mission Impossible’ for Soft LandingEconomist Nouriel Roubini, who’s been dubbed “Dr. Doom” for his pessimistic-yet-accurate prediction of a financial market meltdown in 2007–2008, recently predicted a “long and ugly” recession in the United States that will send risk assets plunging.
He said it’s “mission impossible” for the Fed to hit a soft landing as it tightens policy to bring inflation down to 2 percent.
Roubini sees a combination of economic stagnation and persistently high inflation, much like the dreaded stagflationary spell in the 1970s that bedevilled economies.