The Federal Reserve FOMC announced another Federal Funds rate hike, raising the target rate to 2.5 percent. That was widely anticipated. What the market did not like was a less-than dovish stance from Jerome Powell and his merry band of serial arsonists, as he stuck to the script that everything is awesome in the land of milk and honey. Aside from the drop in 10-year Treasury yields, there are important ramifications for the real estate market as the failures of Federal Reserve policy, and the consequences that come with it, become increasingly evident.
Make no mistake, the Fed is not raising rates because the economy is awesome or because the labor market is robust. True, the Fed would probably be perfectly happy to squash wage inflation in its tracks just as working stiffs are finally seeing some wage gains approaching real inflation in the system. But that’s not the real story here. The Fed is raising rates to provide themselves cover and ammunition when this latest collection of asset bubbles blows. And it is an impressive collection of bubbles for sure.
This time is different in a sense. It’s not just a subprime mortgage debt bubble that we are dealing with. This time around its a cornucopia of bubbles from student loan debt, subprime auto debt, corporate debt and a shale energy sector “miracle” that is looking increasingly vulnerable. If the oil market goes bust again, Texas will likely pay some serious consequences indeed.
In Mr. Powell’s defense, he had some help with the current state of affairs when the ECB, China and other major central banks followed the Fed’s lead during the Bernanke era, fanning the flames of asset inflation to cover up the system-wide market implosion 10 years ago. Powell inherited a fairly large mess in terms of the balls he is attempting to juggle. The latest “recovery” wasn’t really an organic economic renaissance, but more of a spectacular can-kicking exercise with monetary hubris on steroids. It was a con game of epic proportions.
The FOMC statements themselves are a prime example of the con game the Fed is playing…
“Information received since the Federal Open Market Committee met in November indicates that the labor market has continued to strengthen and that economic activity has been rising at a strong rate. Job gains have been strong, on average, in recent months, and the unemployment rate has remained low. Household spending has continued to grow strongly, while growth of business fixed investment has moderated from its rapid pace earlier in the year. On a 12-month basis, both overall inflation and inflation for items other than food and energy remain near 2 percent. Indicators of longer-term inflation expectations are little changed, on balance.”
Any rational person knows that real inflation is well above the Fed’s ridiculous 2 percent snow job target rate. The government can produce some massaged CPI numbers to keep up appearances, but that doesn’t change reality. Mr. Powell may not see the Fed’s balance sheet runoff creating problems, but the broader economy certainly does, especially when the Fed is hiking interest rates at the same time.
“We don’t see the balance sheet runoff as creating significant problems” Jerome Powell
Dallas-Fort Worth real estate is certainly more vulnerable to a market correction with the Fed’s continued stance of rate hikes and policy “normalization”. Unlike the last housing bubble and bust, the DFW area is not as well insulated from a broader market deline. This is because the Fed supplanted market forces to save the financial system, as rotten as it was. This time around, the DFW real estate market experienced a massive boom on the back of the Fed’s balance sheet expansion. DFW real estate is much more heavily invested/correlated to the latest Fed-induced “recovery”. This means there is a lot of air underpinning the Dallas-Fort Worth housing market.
Mr. Powell is projecting another soft landing, as Fed officials always do. History suggests that FOMC officials will burn down the forest before they have a chance to safely land the plane.
Here is a view of Jerome Powell’s attempt at a soft landing…
“We do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system.” Fed Chairman Ben Bernanke – May 2007