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All the pundits who have been predicting large rate cuts this year just baffle me. The jobs situation is very strong, wages are still rising, and consumer spen

All the pundits who have been predicting large rate cuts this year just baffle me. The jobs situation is very strong, wages are still rising, and consumer spending is still going up [1] despite predictions that everyone was going to run out of money in Q4. On top of that, housing is still sky-high and the commercial real estate market hasn't collapsed yet. I must be missing something. [1] https://nrf.com/research/monthly-economic-review-december-2023 https://nrf.com/research/monthly-economic-review-december-20...

matwood 3y ago
Anyone predicting large rate cuts is also predicting a recession. Felt like nearly everyone predicted a recession last year that never came. More likely given the data is we end up with 2-4 small rate cuts this year as the Fed tries to stick the landing.
rKarpinski 3y ago
>> I must be missing something. The upcoming presidential election
- HDThoreaun 3y ago
  The fed is independent.
  - hammock 3y ago
    Independent of what?
hibikir 3y ago
If you want housing prices to come down due to raising rates instead of home building, we wouldn't just need the rates themselves to be up. If rates are high, most people don't want to sell their house either, as moves to a bigger house become prohibitive when you go from a smaller house at 2.5% to a bigger one at 7%. What we have now is relatively few home sales, which aren't enough to stay on the market for long, as there are barely enough to meet the demand of people who don't care much about mortgage interest rates. The typical force for prices to go down in a situation like this involves too many houses for sale. And given that most new construction froze, as the interest rates also hurt builders, we'd need an increase of supply from people being forced to sell, at a time few want to. That means large job losses and being unable to afford the mortgage they already have. A job market so bad, we'd most likely been in a pretty big recession. Given that the fed wants to avoid this, it's very unlikely that we'll see home prices fall at all unless they mess up. This isn't that weird in other parts of the world: There's been soft landings in other countries, just never in the US. The whole idea of rate cuts isn't just a matter of pundits. Jerome Powell suggested up to three rate cuts in 2024, and him speaking is not punditry: Depending of who you are learning macro from, it is forward guidance, a form of monetary policy. Covid, the lockdowns, and the post-lockdown period have been large natural experiments, testing whether different macroeconomics theories hold water. We had a by-the-book supply shock, followed by different levels of fiscal and monetary stimulus throughout the world. Economists will argue about this for decades.
- sgerenser 3y ago
  I think home construction will be the thing to do the job, it just takes time. For years, my area (The Triangle area of NC) has had a huge amount of home construction that has kept home prices rising at only a very reasonable 3-4% per year over the past few decades, despite large job growth and lots of tech employment. No reason to get into a bidding war over an existing house if you can go a mile down the street and have your pick of 7 different new home communities. Suddenly when construction ground to a halt in early 2020, prices started spiking by 30%+ per year (extremely low interest rates obviously was a factor as well). Construction seems to be back in full swing over the past year, so basically anyone who wants a new house can buy one if they're willing to wait 6 months or so. New construction prices have leveled off and the junkiest tract houses are closing at $100K or more below their prices a year ago (still $200K more than they would have sold for in 2019 though).
  - HDThoreaun 3y ago
    That area in NC is basically the best in the country in terms of housing starts. Most other large metros are far behind where they need to be, and the higher rates has absolutely hurt them as the NIMBY policies make construction/development take longer which means more loans.
sf_rob 3y ago
The argument for a rate cut is that the effective rate (real rate adjusted for inflation) will increase as inflation subsides and headline rate is held. So the same rate that was pumping the brakes at 7% inflation would be slamming them at 2% inflation. I agree with your skepticism though.

matwood 3y ago

Anyone predicting large rate cuts is also predicting a recession. Felt like nearly everyone predicted a recession last year that never came. More likely given the data is we end up with 2-4 small rate cuts this year as the Fed tries to stick the landing.

rKarpinski 3y ago

>> I must be missing something. The upcoming presidential election

HDThoreaun 3y ago
The fed is independent.
- hammock 3y ago
  Independent of what?

hibikir 3y ago

If you want housing prices to come down due to raising rates instead of home building, we wouldn't just need the rates themselves to be up. If rates are high, most people don't want to sell their house either, as moves to a bigger house become prohibitive when you go from a smaller house at 2.5% to a bigger one at 7%. What we have now is relatively few home sales, which aren't enough to stay on the market for long, as there are barely enough to meet the demand of people who don't care much about mortgage interest rates. The typical force for prices to go down in a situation like this involves too many houses for sale. And given that most new construction froze, as the interest rates also hurt builders, we'd need an increase of supply from people being forced to sell, at a time few want to. That means large job losses and being unable to afford the mortgage they already have. A job market so bad, we'd most likely been in a pretty big recession. Given that the fed wants to avoid this, it's very unlikely that we'll see home prices fall at all unless they mess up. This isn't that weird in other parts of the world: There's been soft landings in other countries, just never in the US. The whole idea of rate cuts isn't just a matter of pundits. Jerome Powell suggested up to three rate cuts in 2024, and him speaking is not punditry: Depending of who you are learning macro from, it is forward guidance, a form of monetary policy. Covid, the lockdowns, and the post-lockdown period have been large natural experiments, testing whether different macroeconomics theories hold water. We had a by-the-book supply shock, followed by different levels of fiscal and monetary stimulus throughout the world. Economists will argue about this for decades.

sgerenser 3y ago
I think home construction will be the thing to do the job, it just takes time. For years, my area (The Triangle area of NC) has had a huge amount of home construction that has kept home prices rising at only a very reasonable 3-4% per year over the past few decades, despite large job growth and lots of tech employment. No reason to get into a bidding war over an existing house if you can go a mile down the street and have your pick of 7 different new home communities. Suddenly when construction ground to a halt in early 2020, prices started spiking by 30%+ per year (extremely low interest rates obviously was a factor as well). Construction seems to be back in full swing over the past year, so basically anyone who wants a new house can buy one if they're willing to wait 6 months or so. New construction prices have leveled off and the junkiest tract houses are closing at $100K or more below their prices a year ago (still $200K more than they would have sold for in 2019 though).
- HDThoreaun 3y ago
  That area in NC is basically the best in the country in terms of housing starts. Most other large metros are far behind where they need to be, and the higher rates has absolutely hurt them as the NIMBY policies make construction/development take longer which means more loans.

sf_rob 3y ago

The argument for a rate cut is that the effective rate (real rate adjusted for inflation) will increase as inflation subsides and headline rate is held. So the same rate that was pumping the brakes at 7% inflation would be slamming them at 2% inflation. I agree with your skepticism though.