Philip N. Jefferson, Vice Chair of the Federal Reserve, addressed the impact of higher interest rates on the housing market and inflation, at the Mortgage Bankers Association’s Secondary and Capital Markets Conference.
Rate Sensitive: “The housing sector is one of the most interest rate–sensitive parts of the economy,” Jefferson noted. The restrictive monetary policy stance has significantly impacted the housing market, helping to better balance supply and demand and exerting downward pressure on inflation.
The Lag: Jefferson explained the lag in shelter cost calculations, which include monthly rents paid by tenants and theoretical rents homeowners would pay. Changes in market rents take time to reflect in the Personal Consumption Expenditures (PCE) housing services prices due to the slower adjustment of existing rents compared to new market rents.
- “The primary reason for this lag is that market rents adjust more quickly to economic conditions than what landlords charge their existing tenants. This lag suggests that the large increase in market rents during the pandemic is still being passed through to existing rents and may keep housing services inflation elevated for a while longer.”
An Eye on Housing: The Fed recognizes the housing sector’s critical role in the transmission of monetary policy. Jefferson concluded, “The housing sector is also a key part of the transmission mechanism of monetary policy. That is one reason why policymakers will continue to pay close attention to this vital sector.”
