Fed Chair Jerome Powell meets with Congress this week. He will face pressure on two different fronts.
Pressure on Two Fronts
Bloomberg reports Powell to Face Pressure on Rates From Democrats, Bank Rules From Republicans
The Fed chair heads to Capitol Hill on Wednesday and Thursday for his semiannual testimony before Congress, two years after the central bank began its aggressive battle against surging inflation. With the economy powering along and inflation inching toward the Fed’s sweet spot, Powell will make the case for why officials are in no rush to lower rates.
In a Jan. 30 letter, Senator Sherrod Brown urged Powell to cut rates “early this year,” arguing that high rates are hurting small businesses and putting homeownership out of reach for many Americans. That missive from the Senate Banking Committee chair, an Ohio Democrat who is running for reelection this year, could give cover to other committee Democrats who want to press Powell on rates.
Housing
Maryland Democrat Chris Van Hollen, in an interview last week, said the Fed needs to focus on housing costs “and taking actions necessary to make things more affordable for more Americans.”
“Right now those high interest rates are actually increasing costs for families because one of the big parts of costs for families is housing,” Senator Elizabeth Warren, a persistent Powell critic, said in a Bloomberg Television interview. “It’s time to get those interest rates down.”
Capital Rules
Republicans will use Powell’s appearance to grill him on the Fed’s proposal to ramp up capital requirements for big banks by almost 20%.
Election Year
Powell has repeatedly said the looming election plays no role in policy decisions, but some Fed watchers worry rate cuts this year — investors are betting the first reduction will come in June — could be perceived as the Fed giving a boost to Democrats.
Elizabeth Warren Hoot of the Day
Home prices are at record highs. Just what does she think will happen to home prices and inflation if Powell cuts rates too early?
Small businesses are struggling but why is that?
The answer is Biden’s free money to students, Biden’s regulatory madness, Biden’s union push, and massive minimum wage hikes, especially in places like California are all highly inflationary.
The Fed’s Big Problem
On average, the economy looks OK. But averages are misleading. Several large groups of people are struggling. They all have one thing in common.
The Fed’s Big Problem is There Are Two Economies But Only One Interest Rate
Who’s Unhappy?
Those looking to buy a home but cannot afford the record high prices, are not faring well in this economy.
The last great time to buy a home was in 2012. Over the next eight years, home prices moved further and further away from wages.
When the Covid pandemic hit in 2020, we had record QE, record fiscal stimulus, mortgage rates hit record lows, and inflation hit the highest levels in 40 years.
When the Fed slashed interest rates to zero, mortgage rates fell below 3.0% for an extended period allowing everyone to refinance at 3.0 percent or below. Most did.
Winners and Losers
- The homeowners are generally doing OK. The home ownership rate is 65.7 percent.
- The 34.3 percent who rent are generally not doing OK.
The study did not break things down by home owners vs renters, but I suspect most of the use is by renters.
According to the latest CPI report, rent was up at least 0.4 percent for the 29th straight month. Shelter, a broader category, rose 0.6 percent. Food rose 0.4 percent.
Credit Card and Auto Delinquencies Soar
Credit card debt surged to a record high in the fourth quarter. Even more troubling is a steep climb in 90 day or longer delinquencies.
Record High Credit Card Debt
Credit card debt rose to a new record high of $1.13 trillion, up $50 billion in the quarter. Even more troubling is the surge in serious delinquencies, defined as 90 days or more past due.
For nearly all age groups, serious delinquencies are the highest since 2011 at best.
Auto Loan Delinquencies
Serious delinquencies on auto loans have jumped from under 3 percent in mid-2021 to to 5 percent at the end of 2023 for age group 18-29.
Age group 30-39 is also troubling. Serious delinquencies for age groups 18-29 and 30-39 are at the highest levels since 2010.
For further discussion please see Credit Card and Auto Delinquencies Soar, Especially Age Group 18 to 39
Generational Homeownership Rates
The above chart is from the Apartment List’s 2023 Millennial Homeownership Report
Those struggling with rent are more likely to Millennials and Zoomers than Generation X, Baby Boomers, or members of the Silent Generation.
The same age groups struggling with credit card and auto delinquencies.
On Average Everything is Great
Average it up as Fed and all the clueless economic and political writers do, and things look great.
This is why we have seen countless stories attempting to explain why people should be happy.
Hello Mr. Powell
There are two economies (the homeowners/asset holders and everyone else). However, there is only one interest rate. Patience please says Powell.
Lowering rates risks risks fueling the housing bubble and the most expensive stock market in history.
It’s Powell’s move. No matter what he does Elizabeth Warren will howl.
She wants lower interest rates, but that will stoke inflation and it will not do a damn thing for renters who don’t have a down payment and cannot a house no matter what the mortgage rate is.
This is a dilemma of the Fed’s making and there is no solution.
Maryland Democrat Chris Van Hollen, in an interview last week, said the Fed needs to focus on housing costs “and taking actions necessary to make things more affordable for more Americans.”
Is she against illegal immigration? Illegal immigrants have to live somewhere. Millions have entered the country in a short time.
Chairman Zao, I mean Powell, clearly works for Wall Street and will lower rates by the summer. Now based on everything I’ve seen and heard, those rates affecting inflation will “lag”. If Trumpy Bear looks like a winner, they’ll do at least 2 rate drops before the election to create that crisis they want to screw “populist” Americans. If the fix-is-in (most likely) it will create enough economic stimulus to give people that high they need to feel confident, especially in the housing market. No real harm will come from it except to hard-working, taxpaying, Americans. Nope, the illegals and lazy will still get their money.
“The 34.3 percent who rent are generally not doing OK.”
And ALL productive enterprise rent. Even the vanishingly few who nominally “own.” (he productive enterprise still “rent.”) Hence why “we” can’t compete at anything anymore. Falling down the stairs of airplanes falling out of the sky, being the only possible exception.
Correcting the renter vs owner imbalance requires tax policy changes. Monetary policy is impotent. Since most congresspersons have a real estate investment portfolio, chances of corrective tax policy changes are zero. Sucks to be you, anyone under 40.
“on average…”
One foot in a blast furnace, the other encased in glacial ice…on average, you’re OK.
Keeping rates high is discouraging home builders and causing the housing market to freeze. This is helping to drive rental prices up which is captured in inflation indicators. We need an economy of plenty, not one of constraint. The home builders need to be encouraged to build, and build massively.
The government is keeping spending high. Was reading commentary that the government is borrowing a trillion every hundred days. The government is fighting the FED by pushing inflation.
Both parties are trying to get Powell to do hings that are bad for the US economy and financial system, but Powell wants to continue doing other bad things such as fractional reserves.
1) Eventually corporate debt will demand that rates are lowered so they can refi.
2) A ton of people are on the sidelines regarding housing. No one wants to trade a 2.8% mortgage for a 7%, but 5% is palatable and people know that’s a historically good rate. Lower rates will ignite housing again.
I’m puzzled by your statement. If rates drop, home prices will shoot up, and monthly mortgage payments will stay flat vs today’s payments. Downpayments will need to be larger. Lowering rates isn’t going to help anyone, and may even make things worse.
Maybe, but millions of people that currently don’t want to move, will. No one will trade a low mortgage rate for a higher one unless they absolutely have to.
Higher prices means more equity, so for me 5% mortgage rates would be beneficial. The increase in equity offsets the higher price.
Why do we need to ignite housing? Prices are already too high now.
If you mean sales of homes, why does that matter other than for real estate agents who are salivating for commission checks.
The only way you can get cheaper housing is to build lots of it. Even then, prices are limited on the downside by the absolute cost of buying the land plus the labor/materials needed to build the home to whatever the local code is. Lower rates can’t do anything for that at all.
IMHO Powell is clearly in an untenable position and odds are he will either resign or be fired within the next 12 months. Even more certainly if Trump happens to win the election.
Gold finally understands this.
Explain again what the Republicans want, and why? What does Mish think is the better idea?
I think an arguments can be made that above a certain level of “big”
1) Banks should be broken up into smaller banks…
2) The extra amount banks have available to lend should be 100% shareholder capital, or accredited investor deposits, with a penalty for early withdrawal. What has in recent years been called “bail in”.
We still have the problem of allowing big banks to fail, and how to handle the after and splash effects. Everyone fears a 1930s Great Depression credit freeze.
The Fed is in a bona fide catch-22, lower rates and inflation rips, keep rates high and the economy slowly grinds down. The PCE report that came out last week showed inflation hot for services and it should be, too many people retiring, not enough young people working.
In the end it won’t matter, inflation has only one way to go and that’s up. Young people will eventually be able to negotiate higher wages, old people on fixed income will get thoroughly screwed. The real pain starts in a few years. I can already hear the horror stories of seniors eating cat food or living in vans/tents and the karma cycle will be complete.
“It’s turtles all the way down and inflation all the way up!”
It’s already started, people are living in tents today.
Liz Warren wants lower rates to help families who are fighting inflation? But following general economic consensus lower rates in an inflationary environment would raise inflation hurting families further … Hmmm. Is Liz long 0DTE call options? During the mortgage / financial crisis, lucky Liz was flipping real estate like pancakes. Nice.
Anything depending upon financialization is artificially overpriced.