The Fed Should Get Inflation Right, Stop Raising Interest Rates

The nation's central bank should get inflation right and stop raising interest rates.

That's the consensus among several experts the International Business Times contacted following the release of the September Consumer Price Index (CPI), a measure of the cost of living across the nation and a critical input into the Fed's inflation monitoring and decision to set monetary policy.

The core argument of these experts is that the official CPI overstates a key component of CPI—the cost of owner-housing.

According to the most recent CPI, owner rent is up 0.6% Month-over-Month, which makes inflation look high. However, according to Zillow's observed rent index, U.S rents were only up 0.165%, using rent data, meaning that actual inflation is much lower than the one reported by the Bureau of Labor Statistics (BLS).

"We have long pointed out the discrepancies between the housing index as reported by the BLS and our own, real-time US housing inflation data," Oliver Rust, head of product at independent inflation data aggregator Truflation, told IBT. "We believe the BLS housing inflation number suffers a long lag and therefore fails to reflect the current state of the US housing market accurately."

Rust observes that in September, the rented and other lodgings portion of Truflation's real-time US housing index has recorded only a marginal monthly increase of 0.13%, in line with the Zillow number. "This was driven by the spike in housing supply, which has caused a gradual increase in rental vacancy rates, which are now at the highest level since June 2020," he added.

The Truflation index is based on rental prices, household debt, and property prices, drawn from 13 independent sources (including Zillow) and capturing millions of transactions every month," Rust explains. In contrast, BLS collects its data from just 50,000 residencies every six months.

Young Pham, a financial planner and investment analyst affiliated with BizReport, observed that the Federal Reserve misjudged inflation in the past "when it characterized it as "transitory," when it appeared as price hikes were temporary, primarily due to supply chain disruptions and pandemic-related factors. "However, as we have observed, inflation has persisted and grown into a significant economic concern," he explained. "This raises questions about the Fed's ability to predict and respond to economic trends accurately.""

Dan North, Senior Economist at Allianz Trade, believes it is time for the Fed to stop raising interest rates, as it has already gone on the most aggressive path of rate hikes in the modern era, and inflation is under control by most measures. "For example, the PCE core rate has come down from a 5.2% y/y rate last August to 3.9% now," he explained. "And it came down in August to 3.9% from 4.3% previously, a sharp 0.4% fall. Likewise, the CPI core rate fell from 6.6% y/y last September to 4.1% now."

Still these numbers are well above the Fed's official inflation target of 2%, but North sees another reason for the Fed to stop hiking: giving previous hikes a chance to work through the economy.

"Remember that monetary policy changes take 3-5 quarters to take full effect," he said. "So, all those rate hikes, probably since last November, haven't fully affected inflation and the economy. That was a total of five rate hikes for 150 basis points. They haven't had a chance to work yet. It's time to stop."

Pham added that the Federal Reserve's handling of the inflation situation is a complex task that demands a delicate and adaptive approach. "While the pause in rate hikes is understandable, it is imperative for the Fed to remain vigilant and responsive to the evolving economic landscape, keeping inflationary pressures in check while ensuring the overall economic stability of the nation."

Sarah Alvarez, Vice President of Mortgage Banking at William Raveis Mortgage, believes the Fed is in a challenging position. "They are doing their best to sort through the economic data to determine the best path forward in their fight against inflation, but also must take into consideration the consequences of other real-time global events," she said. "In recent weeks, these have included keeping an eye on the conflict in Ukraine and Israel, oil prices, a potential government shutdown, and fallout from possible commercial loan market defaults."

"Pausing on rate increases aligns with the current economic climate and could contribute to a more balanced and stable financial environment," added David Donovan, EVP of Financial Services at digital consultancy Publicis Sapient.

Danielle Marceau, the Principal Economist and Director of Analytics at Prevedere, is the heretic voice in this group of experts. He thinks that the Fed is taking the proper steps by not prematurely ending the fight against inflation after only a few months of optimistic data."

"The inflation rate is still elevated well above the target rate, and the labor market is still extremely tight, although it is trending in the right direction," he told IBT. "The resiliency of the US consumer and the tight labor market, along with increasing energy prices and potential supply chain disruptions from geopolitical turmoil around the globe, still provides significant upside risks to inflation."

Nonetheless, Marceau also believes that the Fed must navigate the coming few months cautiously. "And understand that the road to target rate inflation is likely to be bumpy and a more significant cooling in overall economic growth will need to take place to reach that target."