It doesn’t seem imminent, but housing market meltdown worsens as Fed officials warn ‘economy will slow’

Topline

Cooling inflation has helped temper fears of a looming recession, particularly as the labor market continues to show historic strength, but a worsening housing market slump and high uncertainty over the Interest hikes from the Federal Reserve have many experts, including politicians, warning that it’s still too early to tell how tough this economic downturn will end up being.

Highlights

“It doesn’t look like a recession now,” Minneapolis Fed Chairman Neel Kashkari, one of 12 central bankers who vote on Fed policy changes, said in a public appearance Thursday. noting that the labor market remains very strong, wages are rising and consumer demand remains resilient.

While acknowledging the strength in the economy, which comes as inflation begins to show signs of easing, Kashkari also sounded cautious, asking: “…can we keep bringing inflation down without trigger a recession? then responding, “I don’t know.”

He noted the Fed needed to “urgently” temper still-high inflation and pledged to keep raising interest rates to help calm demand, then warned the economy would “continue to slow as authorities continue to hike rates, making a recession more likely.”

The cautious statements came after homebuilders and real estate agents declared a recession in the housing market this week, as rising house prices and mortgage rates continued to drive away potential buyers and push demand at the lowest level since the turn of the century.

The Atlanta Fed cut its projections for third-quarter economic growth from 2.5% to 1.8% on Tuesday after data showing housing starts unexpectedly plunged 9.6% last month in lowest level in more than a year, with experts blaming deteriorating sentiment on rising mortgage rates.

Economists at Goldman Sachs also worry it will be difficult to avoid a recession as the Fed scrambles to fight inflation, saying on Tuesday that officials “have gotten off to a good start but [have] still a long way to go”; On Monday, Moody’s Analytics estimated a 50% chance of a recession within the next year.

housing market

Rising interest rates have a brutal effect on the housing market, driving up the cost of buying a home by hundreds of dollars each month and causing demand to fall accordingly. Existing home sales have plunged nearly 30% from their peak in January. Meanwhile, home prices are still skyrocketing and making affordability even worse. “We are seeing a housing recession in terms of declining home sales and construction; however, this is not a house price recession,” National Association of Realtors economist Lawrence Yun said Thursday. , noting that the median price of existing homes fell to $403,800 from a record high in June, but is still up nearly 11% from a year ago.

Inflation

Consumer prices rose 8.5% in the 12 months to July, slowing for the first time in months and fueling hopes that the Fed’s efforts to calm inflation may finally bear fruit. fruits. After an unprecedented spike in gasoline prices, inflation hit a 40-year high of 9.1% in June.

The Fed

The Fed raised interest rates another 75 basis points at its last policy meeting in July, as officials discussed ‘unacceptable inflation’ and acknowledged economic growth would be ‘significantly weaker’ than expected. they didn’t think so a month ago. raised interest rates by 2.25 percentage points this year. Goldman says the majority of the hikes are behind us in this tightening cycle and only forecasts a 50 basis point rate hike in September and 25 basis point hikes in November and December. it depends on the drop in inflation.

labor market

After a hit jobs report, which showed the economy added more than half a million jobs in July, jobless claims fell again this week, showing continued strength in the job market. work despite waves of layoffs among some giant corporations. Average hourly earnings, meanwhile, jumped more than expected, climbing 5% in July to $32.27, the highest on record. “Any easing in the labor market is marginal,” Pantheon Macro chief economist Ian Shepherdson said, citing better-than-expected data. “There is no recession here.”

Sotck exchange

Stocks have struggled to find direction after rebounding more than 15% since the Fed’s rate hike in June, when many investors concluded that perhaps the worst of the hikes was over. However, the S&P 500 is still down 12% this year, compared to a 21% gain in 2021. Bank of America has warned that slower-than-expected economic growth could send stocks further tumbling, and if inflation is not under control, a more aggressive Fed policy would surely make the markets tremble again.

Further reading

The Fed still has a ‘long way to go’ as it tries to rein in inflation without causing a recession (Forbes)

Stock market crash is not over, says indicator with ‘perfect’ balance sheet (Forbes)

The housing market slump is here: Homebuilders cut prices as buyers cancel contracts (Forbes)

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