Why High Housing Costs Might Force the Fed to Keep Raising Rates

September should be an interesting month for the Federal Reserve and American households. Inflation continues to be an ongoing problem for US consumers, even though prices are starting to cool off. Some believe there is good reason for the Federal Reserve (the Fed) to call off another interest rate hike at its next meeting.

Why Does the Fed Raise Interest Rates?

Inflation happens when too many people are chasing too few goods. Today, it’s the result of supply chain problems keeping goods off the shelves, eager-to-spend consumers emerging from the pandemic, and high gas prices as the war in Ukraine throttles oil supplies. 

When inflation takes hold, the Fed tries to cool things off by raising interest rates, which slows spending and takes the pressure off of prices. To that end, they have increased short-term interest rates three times so far in 2022. 

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Should the Fed Change Course?

Currently, retail inventories are rising and the cost of gasoline is starting to back off. It would seem that higher rates are doing their job. 

Raising interest rates is tricky for the Federal Reserve. On the one hand, there are warning signs that the US may already be in a recession. Hiking interest rates could prompt big spikes in unemployment. It can also make things harder for American households carrying variable-rate debt like credit card balances. 

Why the Fed Might Take Interest Rates Higher 

However, the high cost of housing in the US might be a good reason for Federal Reserve chairman Jerome Powell to push through another rate hike next month. This would peg the Federal Funds rate at 3% to 3.25%, up from 2.25% to 2.50%.

Inflation is still high in the US, with costs about 8.5 % over prices from last year (excluding fuel and food price increases). But the toughest problem is housing costs in many parts of the country. 

In June 2022, the average price of a single-family home was up more than 18% from the previous year to over $426,000. The dilemma of rising prices in the housing market is just one aspect of inflation that the Fed would like to get under control.

The Fed’s Balancing Act

Balancing productivity with inflation concerns will be on top of Powell’s agenda come September. Some believe that a .75% rate hike in September would be a good thing to blow out all the inflationary excesses that continue to dog the economy. But strong medicine is not always pleasant and past Fed decisions have usually favored standing pat on interest rates or cutting them—especially in the face of a weak economy—to jump-start productivity.