The Federal Reserve’s low interest rates are subsidizing the mortgage market, and creating a bubble in housing. Randall W. Forsyth explains in MarketWatch, writing:
When the Federal Open Market Committee begins its two-day meeting on Tuesday, it ought to consider whether its policies aimed to bolster housing may be having negative side effects.
With the market for new and existing homes red hot, the rationale for subsidizing the mortgage market has largely passed. Indeed, the Fed’s policies may be hurting home affordability as much as they’re helping.
The Federal Reserve’s policy-setting panel is all but certain to maintain its current ultra-easy policy stance of near-zero short-term interest rates and heavy securities purchases to continue to spur the economic recovery from the steep pandemic downturn. There will be no updated Summary of Economic Projections or “dot plot” of the FOMC members’ guesses of the federal funds target rates.
However, the FOMC will discuss when to reduce the current pace of monthly securities purchases from the current $80 billion of Treasuries and $40 billion of agency mortgage-backed securities. Fed Chair Jerome Powell has said the central bank isn’t even “thinking about thinking about thinking about” tapering its bond buying. (Although he may have added another “thinking about” that I might have missed.)
The rationale is that the labor market is far from recouping the jobs lost in last year’s steep contraction. Even a string of robust payroll gains like March’s 900,000-plus pop would take many months to close the shortfall of 8.5 million jobs.
As for the Fed’s other mandate, it wants inflation to run somewhat above its nominal 2% target for a considerable period to make up for past shortfalls so that prices average that 2%.
But as colleague Lisa Beilfuss points out, the Fed seems to be ignoring the effect that rising food and housing costs may be having on inflation psychology.
Read more here.