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Tuesday, March 07, 2023

Pandemic Economics, Housing and Monetary Policy: Part I; The Economic Fireworks have been in Housing!

by Calculated Risk on 3/07/2023 10:23:00 AM

Today, in the Calculated Risk Real Estate Newsletter: Pandemic Economics, Housing and Monetary Policy: Part I

A brief excerpt:

Pandemic economic outcomes were frequently largely unexpected.

For example, early in the pandemic, there was a shortage of toilet paper. Since there are two supply chains for toilet paper - one residential and the other commercial - and many more people were using the bathroom at home instead of at the office, there was a shortage of residential toilet paper. ...

More generally, in 2020, we saw a surge in spending on goods as many services were shut down. With fiscal policy supporting incomes, the increase in demand for goods eventually led to an increase in prices as inventories were depleted.

YoY Goods PricesThe graph above shows that goods prices started to increase year-over-year (YoY) in 2020 and accelerated in 2021 due to both strong demand and supply chain disruptions. ...

In his testimony today, Fed Chair Powell clearly doesn’t see service inflation as transitory:
That said, there is little sign of disinflation thus far in the category of core services excluding housing, which accounts for more than half of core consumer expenditures. To restore price stability, we will need to see lower inflation in this sector, and there will very likely be some softening in labor market conditions.

… the latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated. If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes. Restoring price stability will likely require that we maintain a restrictive stance of monetary policy for some time.
emphasis added
Clearly Powell believes service-related price increases will not as transitory as goods and commodities and will require “some softening in labor market conditions”. The FOMC is clearly committed to further raising rates to curb inflation.
In Part II, I’ll discuss what I think will happen with housing going forward and - since housing is the key transmission mechanism for monetary policy - the implications for Fed policy. I’ll suggest some out of consensus possibilities!
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