Tracking the Fed: Why Did It Take So Long to Act?

Abstract

In an episode of BiggerPockets' On the Market Podcast, we spoke with Nick Timiraos, Chief Economics Correspondent for The Wall Street Journal, to get his thoughts on the Fed's plans now that the Fed has increased its interest rate by 0.75%, the most aggressive increase since the 1990s. The Fed doesn't directly set mortgage rates but determines the interest rate banks pay to borrow from their reserves overnight. That's pushed the inflation rate to 8.6%, according to May's CPI report, and now the Fed will do whatever it can to keep that rate from rising. Why the Fed is Taking Action Now If inflation has been a problem since last year, why is the Fed suddenly getting aggressive with interest rate hikes? During the pandemic, specific supply-constrained industries, such as new and used cars, saw the highest price increases. "A neutral interest rate is the level the Fed thinks isn't providing any stimulus to the economy. If you think of the economy as a car and the Fed is the driver, they're taking their foot off the gas. They're not pushing on the brake, but they're trying to find that place where they're no longer pushing on the gas, not necessarily stepping on the brake." The Fed is "Not trying to induce a recession," says Federal Reserve Chair Jerome Powell. What About Asset Prices? Real estate appreciation isn't factored into the Fed's assessment of inflation, but the Fed is charged with overseeing the financial system's stability. "Now, there's been a big debate over the last 10 years which is: should the Fed raise interest rates even if inflation's contained and even if they're meeting their mandate unemployment, but to prick a bubble? Because an asset bubble could jeopardize their ability to achieve both of their other goals. And the argument has generally been, no, we shouldn't use interest rates. We shouldn't raise interest rates to prick asset bubbles." But in 2022, inflation is so high that the Fed needs to raise interest rates regardless.