Today’s Federal Open Market Committee announcement did not provide an explicit reference to an expected tapering of purchases of Treasury ($80 billion a month) and mortgage-backed ($40 billion a month) securities. In addition, as part of its ongoing accommodative policy stance, the Fed held its benchmark target rate near zero percent. In Chairman Powell’s press conference remarks, he stated, “The housing sector remains very strong.”
The Fed noted that indicators of economic activity and the labor market have continued to strengthen, although it did pull back on previously-used language noting progress with the virus. This is likely a nod to the growth in cases due to the Delta variant, although it is worth noting the localized nature of this event, in addition to relatively low levels of hospitalizations and other serious cases nationwide.
The central bank continues to monitor inflation data, including ongoing, elevated levels of commodities and building materials such as and lumber and OSB. Recall that the CPI measure of inflation reached a 13-year high in June. This is why it is critical for supply-chain issues to be resolved through other policy changes if possible, in order to avoid tighter than otherwise required monetary policy in the quarters and years ahead.
The NAHB forecast has projected higher interest rates as the economy expands. However, between April and July rates have eased due to technical factors in the equity/bond markets, as well as some minor pullbacks for GDP projections due to ongoing virus concerns and supply-side market challenges. We still expect 2021 GDP growth to be the best year since 1984.
Additionally, the forecast calls for somewhat above-trend inflation over the next few years. But our model indicates that the current, significant uptick in inflation pressure, as illustrated by the prices of many building materials, will prove to be transitory or moderate over time (this means the growth rates will cool, not that there will be significant declines in such prices). A more hawkish view of monetary policy would be required, however, if wage inflation accelerated (i.e. wage gains without accompanying labor productivity gains).
We expect that before the end of 2021, the Fed will announce a tapering of the bond purchases that form an important component on today’s ongoing, accommodative monetary policy. It is worth recalling that in 2013, the so-called taper tantrum occurred when the Fed announced its plan to pull back on bond purchases as the economy recovered from the Great Recession. At that time, interest rates rose quickly and a housing soft patch followed. The Fed’s current, cautious approach to the policy path of bond purchases is clearly intended to avoid such a transition.
In the meantime, home prices continue to outpace income growth, threatening housing affordability. However, demand remains strong due to preference changes (particularly for larger homes/apartments) and demographics. And it is important from a policy perspective to remember that current rates of home price growth are due primarily to supply-side challenges, particularly an ongoing deficit of housing combined with surges in building material costs, alongside other challenges with respect to skilled labor and lot availability. Chairman Powell noted this view by stating that mortgage-backed security (MBS) purchases were not a major cause of home price growth in his comments to the press, while remarking there is little support for tapering MBS separately/earlier from Treasuries.
For now, the Fed’s objective with respect to monetary policy is summarized as follows, which suggest ongoing accommodative conditions to facilitate economic recovery and repair, including for the nation’s supply chains:
The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. With inflation having run persistently below this longer-run goal, the Committee will aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time and longer‑term inflation expectations remain well anchored at 2 percent.