Inflation Pressures Are Easing but Rate Cut Forecast Remains Uncertain

The New Year is beginning where the old one ended -- with uncertainty about when – or whether – the Federal Reserve will begin cutting interest rates.

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Will they, or won’t they?  The ‘they’ is the Federal Reserve and the question is whether the policy-setting Federal Open Market Committee (FOMC)  will lower interest rates when it meets next in late July.  The committee voted 9-1 in June  to leave rates unchanged, but a post-meeting statement, eliminating previous references to “patience,” signaled a willingness to consider a rate cut, though probably not before next year. The statement also downgraded the committee’s assessment of economic strength from “solid” to “moderate.” 

Sending a similar signal about future rate cuts, and expressing the same concern about economic trends, Fed Chairman Jerome Powell  acknowledged that the argument for a more accommodative policy has “strengthened” in the face of growing concern that economic growth, in the U.S. and worldwide, may be slowing. 

"The crosscurrents have re-emerged, with apparent progress on trade turning to greater uncertainty, and with incoming data raising renewed concerns about the strength of the global economy," Powell said in a speech after the June FOMC meeting.  While not promising a future rate cut, Powell said the Fed will closely  monitor economic reports and “act as appropriate to sustain the expansion.”

Interest Rate Rethink

Then came an unexpectedly strong July employment report, which may alter the assessment of those “crosscurrents” and undercut what had been a strengthening argument for a rate reduction. 

Employers added 224,000 jobs in June, blowing past more modest projections, erasing memories of May’s anemic employment report, and easing concerns that the expansion, which has entered record-breaking territory, may be losing steam.  The economy has now posted positive job numbers for 105 consecutive months. A surge in workers seeking jobs pushed the unemployment rate up to 3.7 percent, but left it still at a 50-year low.  

 “Recession concerns are overblown,” Gus Faucher, chief economist at PNC Financial Services, told the Washington Post.  “There’s no indication that [either] the labor market or the broader U.S. economy is in trouble.”

Although continued employment strength has reassured economists, it has not produced the wage gains they have been predicting. The 3.1 percent increase in average hourly pay over the past year has just barely exceeded the cost of living, indicating  that the fruits of the economic recovery have not been shared uniformly with workers. 

“The lack of acceleration in wage growth suggests that this recovery is still incomplete. This is an important reminder that there are still workers who have not fully benefited from this recovery,” Martha Gimbel, director of research at Indeed Hiring Lab, told the Post.

Trade War Fears

Although most analysts have focused on the employment gains, many continue to worry that the spiraling trade war and the tit-for-tat tariffs it has spawned will slow the recovery and possibly derail it.  Fannie Mae cited the  “ratcheting up of trade tensions,” as the primary reason for slashing  its growth forecast for 2020, predicting what would be the weakest performance  in more than five years. 

Consumer spending has weakened noticeably in recent months (dipping to an annualized pace of 0.2 percent in May) as consumer confidence has declined, at least partly because tariffs are increasing the cost of many goods. Although aggressive hiring suggests that employers remain confident about the economic outlook, Morgan Stanley’s Business Conditions Index plummeted by 32 points in June ─ the largest one-month decline since the gauge was created.

Housing Market Struggles

The housing market, meanwhile, continues to struggle with competing forces: Increasing demand spurred by a strong job market and wage gains (albeit modest ones) on one hand; rising prices and affordability constraints produced by a chronic inventory shortage on the other. 

Although existing home sales increased  slightly in May compared with April, the pace still fell short of the year-ago level. New home sales fell by almost 8 percent in May to a seasonally adjusted annual rate of 626,000 units – the slowest pace in five months.

Pending sales – an indicator of future purchases – increased in May, but they were also almost 1 percent lower than the same month a year ago – the 17th consecutive year-over year decline for this National Association of Realtors (NAR) index.

The solution is obvious, Lawrence Yun, the NAR’s chief economist, maintains:  Builders need to produce more homes. Otherwise, we risk worsening the housing shortage, and an increasing number of middle-class families will be unable to achieve homeownership,” he warned in a recent report.

Builders have not responded to those entreaties.  Housing starts, which had inched up in April, reversed direction in May, falling 4.7 percent below the year-ago level.  Permits for future production were 0.3 percent higher than the previous month, but 5 percent below May of 2018.

“The numbers show the housing industry continues to slip from last year.” Robert Frick, chief economist for Navy Federal Credit Union, told Housing Wire.  At the current pace, he noted, builders will continue to fall short of the 200,000 units per year needed to meet growing demand. 

Increasing Shortfall

Echoing that concern, Freddie Mac analysts noted in a December report:  “From 1968 to 2008, a span of 40 years, there was only one year in which fewer new housing units were built than in 2017 —and this despite rising demand in a growing economy.”  These analysts estimate that decades of under-building have created a shortfall that now totals 4 million new homes, and is growing.

Prospective buyers are struggling with inventory shortages in most major housing markets, and the affordability pressures resulting from the gap between supply and demand.  A recent report by ATTOM calculated that median-priced homes are now unaffordable to median-wage earners in 353 of 473 counties the company surveyed.

Appreciation in home prices has outpaced wage gains in 40 percent of those markets, ATTOM found, forcing workers in 67 percent of the markets to spend more than 30 percent of their income to purchase a home. 

“Despite falling mortgage rates and rising wages, the cost of owning the typical home remains out of reach for a significant financial stretch for the nation’s average wage earners,” Todd Teta, ATTOM’s chief product officer, told  Housing Wire.

A separate analysis by found an equally problematic gap between the homes prospective buyers want and the properties available for them to purchase.  Half of the  buyers responding to a recent survey said they were looking for homes costing less than $288,000 – about 10 percent below the median price of available listings nationwide.

“The price differences between what buyers are searching for and what’s available on the market demonstrates just how big the gap is for entry-level home buyers,” Danielle Hale, chief economist for, said in the report.  “Entry-level homes continue to be difficult to come by as the inventory composition shifts more and more toward higher priced homes,” she added. “This is causing smaller and more affordable homes to appreciate rapidly, resulting in a mismatch between what buyers are able to spend and what sellers expect to receive.”

A Long Wait

The increasing gap between demand (what buyers want) and “effective demand” (what they can afford to buy) probably explains the increasing pessimism reflected in a Freddie Mac survey of current renters.  Only 24 percent of the respondents said it was “extremely likely” they would ever own a home, compared with 13 percent expressing this negative view four years ago.  More than 80 percent now view renting as more affordable than buying, up from 67 percent in the previous survey. More than 80 percent of Millennials and members of Generation X (born between 1965 and 1996) said their inability to save enough to cover a down payment and closing costs is the primary obstacle keeping them on the home ownership sidelines.

According to Unison’s Home Affordability Report, it now takes an average of 14 years for someone earning  the median income to save a down payment for a median-priced home.  That timeline rises to 30 years or more in the nation’s priciest housing markets

“The way things are going, an entire generation of Americans may be approaching retirement before they can securely own a home or be forced to take on more risk than they can reasonably afford in order to realize their dream of homeownership,” Thomas Sponholtz, Unison’s CEO, said in a press statement.  “This is a societal and economic problem that impacts all income levels,” he added, “and [it] can only be addressed through massive infrastructure investments and rapid adoption of smarter and safer non-debt-based finance and homeownership solutions.”