U.S. economy isn’t giving in
By: J. David Chapman/November 10, 2022
Inflation is still on the rise and is presenting a financial challenge to American families. This news actually makes the Federal Reserve’s decision on increasing the cost of funds a little easier. And that decision to raise its policy rate by another 75 basis points affirmed investors’ belief that monetary tightening still has a way to go before creating the desired outcome.
The question is: What is the desired outcome? Obviously, the Fed desires to slow the rate of inflation. Federal Reserve Chairman Jerome Powell has said that they hope to stifle inflation without pushing the economy into recession. Getting high inflation under control almost always involves a temporary contraction of output, leading to higher unemployment.
It is a cat-and-mouse game between the Fed and our industry and the consumers in our economy. If the Fed is suspected of flinching at the possibility of reducing output and therefore causing unemployment, the task gets more difficult to accomplish and, in the end, their strategy would have to continue and be more severe. I get the feeling that the real estate industry has yet to respond to the Fed’s actions. It surely will, but when?
It is very challenging for real estate leaders to ascertain the true state of supply, demand and the economy. It is impossible to say how long supply chain disturbances will persist, causing disruptions in pricing. Builders aren’t likely to reduce prices as demand slows if their costs are rising. Even though demand is waning, because of higher interest rates and increased pricing, the industry is still having a difficult time producing adequate supply to meet demand – artificial demand that was likely caused by questionable government stimulus packages.
The Fed finds itself in a unique position of trying to slow an economy that was partially caused by the government’s interest-rate-manipulation policy and over-aggressive stimulus response to the pandemic. The U.S. government provided stimulus money and unreasonable low interest rates to businesses and consumers during the pandemic to prevent an economic meltdown that ultimately led to an overheated economy and inflation. Now the Fed is tasked with undoing this policy and still not causing recession that it was trying to prevent in the first place. Given all this, nobody should suppose that the Federal Reserve’s job is predictable and straightforward.
J. David Chapman is professor of finance and real estate at the University of Central Oklahoma (jchapman7@uco.edu).