The FED has a Housing Circular Reference Problem

More than anything, the Federal Reserve ("Fed") want's to see inflation at 2%. Despite measured success, inflation sits stubbornly closer to 3.4% (Bankrate.com), keeping rates high for longer may be more likely to contribute to inflation, to which the normal prescription is higher rates. See the problem?

Over the last 12+ months, the Fed has raised its base interest rate past 5.25% to pump the breaks on consumer spending and cool inflation. With post covid supply chains back online, and setting aside factors like money dysmorphia, The Fed's rate hikes have been successful at slowing down the inflation train. Here's is where things get tricky. The cost of shelter (rent/mortgage) makes up 1/3 of the consumer price index (CPI), which is the primary measure for inflation in the US (Brookings). In a recent Marketplace by APM interview former Fed Chair Janet Yellen said inflation is "not where it needs to be". She added that "many Americans are suffering from a cost of living that is posing challenges to them. Rent prices are high." The Fed is unlikely to see further success without addressing this key cost component, but sustained higher interest rates are more likely a cause than a solution.

High interesest rates might restrict some consumer spending, but it does the opposite for housing.

Fed short-term interest rates have a complicated but direct impact to mortgage rates, which at the moment is making it much more expense for home buyers. Renters aren't safe either. Most investment homes are also purchased with leverage (mortgage), which means higher costs for landlords too.

Beyond relatively recent inflation concerns, housing supply has been out of balance with demand in the US for a long time (NPR). When there is not enough housing for everyone who wants it, prices go up. New home and apartment construction is expensive, and developers also have to borrow money for new projects. Higher rates makes it harder to build supply, and less inventory also means higher prices for everyone. Population growth is necessary for our long term economic viability, so reduced demand isn't the answer -just supply.

Sustained high interest rates directly feed inflation (CPI) via housing costs. The Fed's normal response to stubborn inflation would be to raise interest rates further, hence the circular reference problem. Still, when it sees inflation stalling above it's target, the Fed's response is fairly predictable, however undesirable.

To get the Fed (and America) off this spiral, let's hope that Fiscal Policy joins the fight through reducing international trade barriers (tariffs), measured domestic spending, and by limiting special interests subsidies to let the market balance itself more naturally.