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"Inflation is coming down"


People are expecting dramatic cuts in the Fed rate. What happens if it doesn't?
 
Hurricanes and homeowners' associations have cooled Florida’s hot condo market. Condo homeowners have been forced to lower their listing prices to offload their properties—going against the national trend of rising condo prices, a Redfin report published Monday shows.
 
Some economist are forecasting cut in fed rates next month.
 
He's going to have to force the Fed to cut rates before the election to stand even a snowball's chance at reelection. And that's the worst thing you can do when prices are still rising... it's going to be a disaster either way. I say 'he', when I really mean 'they' - they being the folks that are actually running the country. 'He' probably doesn't even know his name.
 
He's going to have to force the Fed to cut rates
Have you heard of the credible threat theory?

Basically the markets remain high believing that the Fed will lower rates. But they don't. Held out far longer than I thought. So then to tamp down expectations Powell et al go on the talking circuit saying they will not drop the rates or not as fast as the market is anticipating. In other words, they keep the market guessing. From anticipating 7 drops in Fed funds rates, the market still is counting on 5. I bet we don't get more than 3 until weeks before the election - and I am guessing. The market has to capitulate their apparent belief that rates will go to near zero. I am of the opinion that zero rates be it 2009 or 2020 are and were a huge mistake. And in the 90s current interest rates would have been welcomed. I was paying over 8% for years then. But because the amount of the payment is the focus of many buyers, 2%-4% loans gave borrowers false ideas that they could pay much more.

Inflation has run the cost of housing up. But many items are much cheaper than they were in 2021. Lumber has returned to rates not seen in a decade. Plywood is much below peak. Builders and repair costs (roofing comes to mind) are extremely inflated. The materials costs do not justify the prices charged even accounting for high labor costs.

So yes, the Biden administration will be making major pressures upon the Fed to dramatically drop the interest rates, knowing inflation will lag the boost to the economy. So will Powell budge? Maybe. Maybe not. He has surprised me already by not giving to the pressure to lower the rate.
 
Core PCE is at a 4.8% run rate, wouldn't expect any rate cuts any time soon.
Bingo. The Fed still holds the credible threat - and intends to try and keep employment as high as possible but dampen down inflation and so far it's more a whack-a-mole situation. Tamp one down and another pops up. The question is how long companies will hang onto employees while hoping for a cut in the rate and reducing their costs. As 1st quarter ends next month, but mid-April we may see a lot of employee lay-offs and those almost always result in people getting behind on car and house payments. If you are a bank who loaned $10,000 over MSRP on a new truck in 2022, the buyer hasn't had enough time to even pay that surplus price, let alone pay down the principal to the current value of a 2-year-old vehicle competing with trucks now available at or below MSRP. There may end up being a slew of 2-3 year-old trucks that are repos and the banks get to take a bath on...which means the bank is getting more and more likely to be charged with "failing to perform 'safe and sound' banking" and then the FDIC steps in...or, infused with Fed cash in the case of TBTF banks.
 
The Fed's Cleveland Nowcast has Core CPI at 4% for the first quarter of 2024, which includes the prediction for March. If you look at the squiggly lines, inflation isn't going down because of high interest rates. No interest rate cuts for you!


Nowcast 2024.jpg
 
The Fed's Cleveland Nowcast has Core CPI at 4% for the first quarter of 2024, which includes the prediction for March. If you look at the squiggly lines, inflation isn't going down because of high interest rates. No interest rate cuts for you!


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And WTI crude oil just topped $80 for the first time in months...Virtually all the oil indexes are over $80 and you only have to check gasoline prices. Last week, I saw the first $3 gas in a long time. Today, virtually every gas station is no less that $3.09.
 
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