The Federal Reserve is facing challenges with the housing transmission channel, as interest rates may not be high enough to effectively regulate the economy. Neel Kashkari, from the Minneapolis Fed, has highlighted this issue, noting that despite efforts to tighten monetary policy, the housing market is still thriving.
Typically, higher interest rates should make homes less affordable and slow down the housing market, leading to a decrease in inflation. However, data shows that home prices, rents, construction, and employment in home building are all on the rise, suggesting that current interest rates may not be restrictive enough.
Kashkari argues that the neutral rate of interest may have increased from previous levels, indicating that rates may need to be higher to control inflation effectively. Additionally, the decision to halt rate increases last summer could be seen as a form of easing, potentially requiring the Fed to resume interest rate hikes to address inflation.
Overall, the housing market’s resilience challenges the traditional understanding of interest rates’ impact on the economy, suggesting that the Fed may need to reassess its monetary policy approach to achieve its inflation targets.
