Dotting The I
"We didn't make a decision about July. Of course it came up from time to time," Jerome Powell told reporters on Wednesday, after the Fed conveyed an inclination to restart rate hikes as soon as next month following a break in June.
"A decision hasn't been made. I do expect it will be a live meeting," he said, of next month's gathering.
Powell was pressed to explain where the Fed believes disinflation is coming from given the new economic projections, which reflected higher growth expectations
It seems ironic to me that Powell both acknowledged that we’ve been in the most aggressive tightening cycle in over a generation for over a year and still maintains confidence that they will get inflation down though they are currently pausing hikes. Obviously he’s calling out reporters for constantly maintaining that cuts are right around the corner but he’s also acknowledging that he’s failed to get the job done while pausing one of his few tools to get that job done. Do I believe him that he believes this will happen? Yeah, but I also don’t think he really knows when or how getting inflation down actually happens. Hope floats!
Compare:
– Powell saying over and over that core inflation is not coming down and all but promising more rate hikes starting at July’s live he repeats live meeting
– The financial media reaction that rate hikes are finished
– The general media reaction that headline inflation is declining
– The broad non-reaction in markets by trading day end yesterday
Either investors are now confident in the decisive downturn in core inflation that Fed needs to see in near-term (bet on wage disinflation or housing disinflation showing up in the next couple months?), or investors think the Fed won’t deliver more hikes even if core inflation continues not responding (bet on rapid bank credit contraction staying Fed’s hand), or investors no longer fear rate increases (bet on asset prices shrugging off another +50 bp?)
I guess it doesn’t have to be a thought process like that. It can be FOMO, systematic flows, and the unbearable pain of making only 5.2% risk-free.
The inflation to 2% case is partly dependent on significant rent disinflation or deflation coming soon.
Where are we in the apartment cycle?
– Architectural billings for multifamily falling fast. https://www.aia.org/pages/6630599-abi-april-2023-business-conditions-soften-
– Bank credit tightening for multifamily CRE loans, and demand falling for such loans, both rapidly/substantially. https://fred.stlouisfed.org/graph/?g=13kJY https://fred.stlouisfed.org/graph/?g=16aCh
– Multifamily debt originations falling fast. https://www.mba.org/docs/default-source/research-and-forecasts/cmf-originations-index/1q23cmforiginationssurvey.pdf
– New multi-family permits rolling over hard. https://fred.stlouisfed.org/graph/?g=16aBl
– New multifamily starts look to be plateauing. https://fred.stlouisfed.org/graph/?g=16aBY
– New multifamily completions still rising. https://fred.stlouisfed.org/graph/?g=16aC6
We’re approaching the peak of the new apartment supply cycle. New apartments coming on the market will rise for another year or so, adding around +1% in many markets (under the rate of population growth in the Sunbelt markets). Meanwhile, the pipeline of future (2025-on) supply is visibly drying up.
Apartment REITs are reporting just under +5% blended rent growth in 2Q23. Renewals higher, new leases lower.
Of course, “rent” in inflation indicies is only partially actual rent paid by renters, with “owners’ equivalent rent” the larger portion.
Thank you, sir for a very useful collection of links. I have been watching what seems to be a monster boom in apartment building in the last three years in the KC metro market and frankly I can’t image how the newly completed units are being absorbed, as little pop growth is attributed to the area. The outcomes will be interesting to see, especially if rates stay up, or move higher.