Fed Officials Started Their Taper Talk. That Doesn’t Mean the End of Easy Money

By Lisa Beilfuss

Federal Reserve Chairman Jerome Powell / Graeme Jennings/Washington Examiner/Bloomberg


It’s official: Federal Reserve officials are talking about tapering monthly asset purchases sooner than they—and markets—had anticipated. 

That doesn’t mean investors shouldn’t continue to count on dovish Fed policy.

“It’s clear the most meaningful topic in the minutes was the progress toward tapering and how it would be implemented,” says BMO Capital’s Ian Lyngen of the minutes released Wednesday from the Federal Open Market Committee’s June 15-16 meeting.

He notes there was debate on both the timing of any adjustment to the $120 billion in monthly Treasury and mortgage-backed security buys, as well as the breakdown between the buying “in light of valuation pressures in housing markets.” 

That’s as “several others” favored an equal pace given that method is aligned with previous communication on the topic.  

While members may have discussed tapering the purchases of mortgage-backed securities ($40 billion per month) sooner than the purchases of Treasuries ($80 billion per month), plenty are skeptical.

“We think this probably won’t happen, because home price inflation is set to slow sharply over [the second half of the year], thanks to falling home sales and adverse base effects,” says Ian Shepherdson of Pantheon Macroeconomics. 

“We still think tapering will start in December and will be split proportionately between Treasuries and MBS,” he adds.

Overall, the minutes were more hawkish than April’s. 

But as Shepherdson says, that was inevitable given forecast changes and the shift in the dotplot of officials’ interest rate expectations published in June. 

To that point, investors should consider Fed officials’ discussion of ““substantial further progress,” which is the language Fed officials have been using to describe conditions necessary for policy tightening. 

“Various participants mentioned that they expected the conditions for beginning to reduce the pace of asset purchases to be met somewhat earlier than they had anticipated at previous meetings in light of incoming data,” but “some” others want to wait for more data over the next few months before reaching a conclusion. 

While “various” sounds like it represents more voices than “some,” economists say the Fed is likely to remain patient over the coming months as they try to ascertain whether labor market and other shortages pushing prices higher are transitory or more persistent. 

“We think the voices pressing for patience will remain the most powerful,” says Shepherdson, adding that fall labor market data are key to how Fed policy will evolve later this year.

The minutes’ framing of the inflation debate should give investors further assurance that the Fed isn’t in a hurry to shift away from its extremely easy policy. 

“A substantial majority of participants judged that the risks to their inflation projections were tilted to the upside because of concerns that supply disruptions and labor shortages might linger for longer and might have larger or more persistent effects on prices and wages than they currently assumed,” the minutes say. 

They also say this: “Most participants observed that the largest contributors to the rise in measured inflation were sectors affected by supply bottlenecks or sectors where price levels were rebounding from levels depressed by the pandemic. 

Looking ahead, participants generally expected inflation to ease as the effect of these transitory factors dissipated.” 

The minutes go on to say: “if the effects of supply constraints proved to be transitory, as expected, then the inflation record from the past 25 years suggested the possibility that low underlying trend inflation…could cause inflation to revert to relatively low levels despite a strengthening economy.” 

At the same time, participants called the ongoing economic recovery “incomplete” and noted that “risks to the economic outlook remained.”

Taken together, we read a still-dovish Fed that is sticking to its messaging around fleeting inflation, a labor market that has room to run and growth that will slow from this year. 

The bond market seems to agree. 

As Peter Boockvar of Bleakley Capital put it: “U.S. Treasuries didn’t blink,” hardly budging from where they traded before the minutes hit. 

Stocks, meanwhile, hung on to gains. 

The S&P 500 was up 0.4% while the Nasdaq 100 was 0.3% higher an hour after the release. 

Investors should continue to look to August, during the Fed’s Jackson Hole Symposium, for more information around tapering. 

Thomas Simons of Jefferies says he still expects an actual tapering announcement to come before the end of the year. 

“Nothing in these minutes suggests anything different,” says Simons, calling the taper talk so far “not very productive” and “clearly just talk for now.”

The FOMC’s next meeting is July 27-28. 

What’s the Japanese for QAnon?

Social media are turbocharging the export of America’s political culture

Movements like Black Lives Matter have spread as far as Hungary, Nigeria and South Korea


Arthur do val just wanted to be somebody. 

A sitting lawmaker in São Paulo’s regional assembly—with, as he boasts in his Twitter bio, the second-largest number of votes of any candidate—Mr do Val rose to fame by heckling lefties at marches. 

He learned this tactic, he explains, from the documentaries of Michael Moore, an American political film-maker.

Mr do Val has since become a talented and prolific producer of web-friendly content. 

His team pumps out hundreds of images and video clips weekly through social media. 

People want to be entertained, he argues, so politics must be entertaining, too. 

Political arguments should be delivered in funny memes and silly videos which, in Mr do Val’s case, tend to focus on promoting economically liberal ideas and bashing the left.

“I tried being a rock star; I failed. I tried to be a fighter, an athlete; I failed. 

I was simply a frustrated businessman. Then, I saw in YouTube an opportunity to exploit my indignation,” he explains. “I just wanted to stand out, and by accident, it took me to a political career.”

Mr do Val’s rise from a nobody to a state deputy by the age of 32 was both unlikely and impressive. 

But he embodies a new transnational class of political entrepreneurs who communicate in memes, videos and slogans. 

They draw on a global flow of ideas, adapt them to local conditions and return them to the ether. 

Many are activists or ordinary people. 

Social media are their most important means of influence—both over their followers and each other. 

The result is not only a new class of unorthodox politicians, but also the globalisation of political ideas, many from America.

America’s films, television and music are loved everywhere. 

Its consumer brands are world-beating. 

Its social-media stars have global influence. 

As the world’s most powerful country, with huge cultural reach, it has always had a hefty impact on political trends and movements.

In 1990 Joseph Nye, a political scientist at Harvard, introduced the concept of “soft power”, which he defined as “the ability to affect others and obtain preferred outcomes by attraction and persuasion rather than coercion or payment”. 

Hollywood, pop music, McDonald’s and Levi’s jeans are all expressions of America’s soft power.

For many people beyond its shores, consuming these goods was as close as they could get to sharing the American dream. 

When the first McDonald’s opened in Mumbai in 1996, Indians queued in their thousands to taste its fabled burger (though made without beef), replicating a scene from Moscow six years earlier. 

(The opening of a Starbucks in Mumbai a decade ago drew a similar response.) 

Mumbai’s film industry, the biggest in the world, is called “Bollywood” to mimic its counterpart in Los Angeles. 

Nigeria has “Nollywood”, Pakistan “Lollywood”.

Even if McDonald’s and Hollywood contribute to growing obesity and unrealistic expectations of police forensics, for policymakers the important thing is that, as Mr Nye puts it, “exerting attraction on others often does allow you to get what you want”. 

A fondness for American brands is positively correlated with favourable views of the American government. 

What has changed is that the culture the country exports has expanded to encompass its politics. 

And in the age of social media, it is memes, not McDonald’s, that are the main vehicle for America’s cultural influence.

Take Brazil. 

Its political scene is full of YouTubers and Facebook influencers. 

These include supporters of Jair Bolsonaro, the president; critics of the government such as Felipe Neto, who rose to fame making videos for young people; and a vast market of political content-makers in between. 

“There is a lot of influence, even unconscious, of the [American] discourse. 

What’s happening there, comes here,” says Mr do Val, citing debates on face masks or race. 

This is not as simple as copying and pasting American arguments, he cautions. 

Rather, America provides the templates that anyone anywhere can apply.

According to Whitney Phillips, a media researcher at Syracuse University in New York, America’s role in shaping political debates comes not just from the norms it promotes. 

It also “flows from its cultural production—the actual stuff of media and memes”, she writes in “You Are Here”, a new book examining global information flows. 

One reason America’s influence is greater now, she says, is that “social media is global. 

And there are way more people outside the United States who use Facebook than in the United States.”

Black Lives Matter sweeps Nigeria

Consider the Black Lives Matter (blm) protests which erupted in America in 2020. 

They inspired local versions everywhere from South Korea, where there are very few people of African descent, to Nigeria, where there are very few people who are not. 

In Britain, where the police typically do not carry firearms, one protester held aloft a sign that read, “demilitarise the police”. 

In Hungary, where Africans make up less than 0.1% of the population, a local council tried to install a work of art in support of the blm movement, only to earn a rebuke from the prime minister’s office. 

Last year the Hungarian government released a video declaring, “All lives matter.”

QAnon, a conspiracy theory that holds that paedophile cannibals run America, began circulating some time in 2017. 

It has since won many adherents outside America. 

In a small QAnon protest in London last year, people carried signs that read, “Stop protecting paedophiles”. 

In France it is finding support among gilets jaunes (yellow jacket) protesters. 

According to one estimate, Germany has the world’s second-largest number of QAnon followers. 

The conspiracy theory has even spread to Japan, despite the country’s radically different political culture.

Cultural influence is not a one-way street. 

British political influencers enjoy big audiences, including in America. 

The odd Canadian gets a look in. 

Mr do Val proudly points to the “confused lady” meme as one that started in Brazil but is now in widespread circulation abroad. 

Yet few people are aware of its Brazilians origins. 

Nor do Brazilian—or any other—movements inspire similar memes across the world. 

The ability to influence the world, even if indirectly, is proportional to a country’s cultural heft (see chart).


Much of this is the work of social media. 

It amplifies new voices, accelerates the rate at which ideas spread, and broadens the scale at which both people and ideas can win influence. 

But established newspapers and television channels also retain immense influence, even online. 

cnn is the second-most-visited English-language news website in the world, after the bbc. 

The New York Times is third. 

In November Emmanuel Macron, the French president, complained to the newspaper about its coverage of a terrorist attack near Paris. 

Mr Macron does not contact every media outlet about its coverage. 

But some 50m people outside America, spread across every country on Earth, read the New York Times online. 

Of its 5.2m digital subscribers, nearly a fifth are outside America.

Media outlets elsewhere take their cues from their American counterparts. 

According to analysis by Kings College London (kcl), mentions of “culture wars” in the British press used to be a quadrennial phenomenon, suggesting they cropped up in conjunction with American presidential elections. 

But in recent years the use of the term has shot up. 

“We have imported the language of culture wars into the uk wholesale,” says Bobby Duffy, the director of kcl’s Policy Institute.

These factors together help explain why QAnon has gained global name-recognition, lockdown-scepticism has taken on American vocabulary and blm protests have spread across the world. 

Just as people everywhere watch Hollywood movies, they also follow American newspapers, television programmes and social media.

The same cannot be said of any other country. 

Take China. 

Protests in Hong Kong elicited sympathy and solidarity, but did not inspire similar demonstrations. 

Few outside China get excited about buying Huawei phones or shopping on Alibaba. 

TikTok, its only globally successful internet product, is split into a Chinese version—Douyin—and the version used elsewhere. 

China’s great firewall keeps the rest of the world from getting in, but it also stops Chinese ideas getting out.

Moreover, the openness of America’s politics allows for a ready appropriation of its symbols and iconography, says Craig Hayden, a professor of strategic studies of the Marine Corps University in Virginia. 

Videos of riots on American streets should, on the surface, damage the country’s standing in the world. 

Instead people in other countries see unrest in Washington or Minneapolis and think America is “engaged in this kind of struggle that’s parallel to ours”, he says. 

And America’s aspirational cachet makes its movements all the more powerful. 

“I can think of a random country somewhere that’s having internal racial strife; we’re not all retweeting what’s going on there,” he adds.

Uncle Sam’s digital megaphone

Just as political power in the age of social media has flowed to disrupters, so too has the power to influence affairs in far-off lands. 

Social-media users in Minneapolis or Seattle can have an impact on the Instagrammers of São Paulo. 

Arguments that start on university campuses in New England migrate to the living rooms of old England. 

The internet promised to help information flow around the world. 

But social media and their algorithms have just amplified America’s voice. 

Charts For A Crazy World, July 5: Soaring Debt, Negative Interest Rates Set Up Gold’s Next Run

BY  

One glance at this chart should silence any talk of “a return to normalcy”. We are emphatically not headed in a normal direction.

next gold run


The liquidity being generated by this debt binge is pushing up prices in a wide variety of sectors. 

Shipping costs, for instance, are soaring…

next gold run


… which is raising manufacturing costs for any company that buys materials or components from overseas (in other words all of them).


next gold run


At the same time, a tsunami of hot money pouring into the financial markets is turning investors into speculators. 

Where most stockholders, both professional and amateur, used to hold their positions for years, today’s overstimulated players now go in and out in months.

next gold run


And they do it with borrowed money. 

Margin debt – created when an investor borrows against existing stocks to buy more – is spiking, not just in nominal terms but as a percent of GDP.

next gold run

Over in fixed income, hot money has kept bond yields from rising along with inflation, producing a negative inflation-adjusted (i.e., real) yield on 10-year Treasuries, something not seen on this scale since the inflationary 1970s.

next gold run


Gold had a spectacular run in the 1970s, and ought to do well in the even more chaotic environment we’re now creating. 

But silver might do even better. 

A declining line on the next chart indicates silver outperforming gold (while both rise).

next gold run


When should the precious metals bull market really get going? 

Probably not until the current bemusement turns to panic. 

But in the meantime, seasonality is becoming positive as we enter what are generally the best months of the year.

next gold run

Boris Johnson to end almost all Covid restrictions in England on July 19

Mandatory mask wearing, limits on indoor gatherings and working from home among measures to be scrapped

Sebastian Payne, George Parker, Clive Cookson and Oliver Barnes in London 

Mandatory mask wearing is set to come to an end in England © Daniel Leal-Olivas/AFP/Getty Images


Boris Johnson is pushing ahead with the removal of almost all remaining coronavirus restrictions in England on July 19, despite warnings from his own scientists that the pandemic is worsening.

Johnson struck a downbeat note as he admitted that case numbers could almost double to 50,000 a day by the reopening date, with deaths likely to continue rising.

Flanked by his scientific and medical advisers, Johnson admitted there was a possibility that restrictions might have to be reimposed in the winter and said he would continue to wear a mask in crowded situations.

Keir Starmer, Labour leader, accused Johnson of being “reckless” and sided with unions that want mask-wearing to remain compulsory in enclosed places and on public transport.

Removing the legal requirement to wear a mask is a totemic move for “lockdown-sceptic” Tory MPs. 

But last month Israel reintroduced a requirement to wear masks indoors amid a rise in cases, just days after lifting the measure.

However, Johnson said it was time to end “government by diktat” and to trust people to take responsibility for tackling the virus.

If all goes to the UK prime minister’s plan, legal limits on social gatherings will end on July 19, along with legal requirements on the wearing of masks and social distancing. 

The “work from home” guidelines for business would be scrapped.

All remaining businesses, including nightclubs, would reopen, while pubs, theatres and sporting venues would be able to operate at full capacity.

While some Tory MPs shouted “hallelujah” at the news that legal Covid restrictions would be lifted unless data sharply deteriorated — a final decision will be taken on July 12 — scientists were far more cautious.

Patrick Vallance, chief scientific adviser, said the successful vaccine programme had weakened the link between infections and hospitalisations but had “not completely broken the link”, warning that “we are in the face of an increasing epidemic at the moment and we need to behave accordingly”.

Chris Whitty, England’s chief medical officer, said there was a “really clear consensus” that some measures and caution would be required. But he supported Johnson’s plan.

“At a certain point, you move to the situation where instead of actually averting hospitalisations and deaths, you move over to just delaying them,” he said.


Johnson’s plan for ‘living with Covid’ in England

- Moving to step 4 of the government’s road map on July 19 

Boris Johnson says that, barring a dramatic worsening in the data, most legal Covid-19 restrictions will end in England on July 19. The prime minister will unveil a final decision on July 12

- Scrapping of ‘work from home’ guidance

From July 19, it will be up to employers to work with staff to agree a return to the workplace

- Wearing masks no longer a legal requirement

Mask-wearing will be a matter of personal discretion but some businesses, such as transport operators, could require their use

- Social-distancing rules to end

The one-metre-plus social-distancing rule, which made the operation of pubs, restaurants and entertainment venues difficult, is to be dropped

- All remaining closed businesses to reopen

The last restrictions on trading are to be axed, with nightclubs added to the list of venues that can reopen

- Covid-19 certificates will not be a legal requirement

Vaccine passports will not be mandated for domestic use, but organisers of some big events may choose to ask customers for proof of vaccination or a negative coronavirus test to help reassure them about safety

- Foreign travel to be liberalised

Ministers are due to set out plans soon to allow travellers from England who have had two jabs of a Covid-19 vaccine to visit amber-list countries without having to quarantine on their return

- School ‘bubble’ system to end


Gavin Williamson, education secretary, is due to announce plans shortly to replace the disruptive self-isolation of large groups of pupils with a testing system

The latest data showed another 27,334 coronavirus infections in the UK, a 53 per cent rise in the past seven days. 

Hospitalisations increased 24 per cent over the same seven-day period. 

A further nine Covid-19 deaths were reported on Monday.

While other ministers, including chancellor Rishi Sunak, have boasted about throwing away their masks as soon as possible, Johnson said he would carry on wearing his in crowded situations and as a “courtesy”.

Labour argues that the mixed messages will sow public confusion, and ministers admit that Sadiq Khan, London mayor, might retain the need for mask-wearing on public transport in the capital.

Johnson argued that the government was pressing ahead with ending restrictions because of the “firebreak” of school summer holidays. 

The alternative would be to wait until 2022, after the winter flu period. 

“If we don’t go ahead now, when would we?” he added.

Gavin Williamson, education secretary, will on Tuesday announce the scrapping of the “school bubble” system of self-isolation, to be replaced by testing.

Quarantine-free foreign travel to “amber list” countries for double-jabbed adults and their children could resume later this month.

The gap for vaccinating under-40s will be shortened from 12 to eight weeks. 

All legal restrictions will be lifted that put limits on indoor and outdoor gatherings. 

Limits on large events will also be lifted.

A handful of legal restrictions, however, will remain. 

Those who test positive for Covid-19 will still be required to self-isolate and follow social-distancing rules. 

Masks will also be required at ports of entry into the UK.

Johnson said he would do “everything possible” to avoid reimposing restrictions but a government document said that Covid-status certificates could “provide a means of keeping events going and businesses open, if the country is facing a difficult situation in autumn or winter”.

Scientific opinion, however, is split on whether Johnson has made the right decision to press ahead with the final easing in the face of rising infections.

Katherine Henderson, president of the Royal College of Emergency Medicine and a consultant at St Thomas’ Hospital in London, said the government had demonstrated “a degree of machoism and triumphalism” in the build-up to July 19.

“We are not in a wonderful situation and the pandemic is not suppressed. 

Instead, the next stage of unlocking is really the lesser of multiple evils,” she said. 

“We must be careful to maintain a really delicate, nuanced message.”

Henderson also said she worried that high levels of infections among young people would hit the NHS workforce, with staff forced to self-isolate. 

“Every day my rota is short because people are self-isolating,” Henderson said, adding that she expected more staff absences after July 19.

But Paul Hunter, professor in medicine at the University of East Anglia, said: “There is a general consensus that Covid will never go away. 

Our grandchildren’s grandchildren will be getting infected with Sars-Cov-2.”

Prof Hunter said it would be best to relax restrictions on July 19 with the summer ahead, schools closed and most adults having completed their course of vaccination. 

In the autumn, schools will be back, immunity beginning to wane and flu reappearing.

“So even though case numbers are rising quite rapidly at present, possibly as a consequence of celebrations around the Euros, I still think it would be safer to lift restrictions now than in the autumn,” he said, referring to the Euro 2020 football tournament.

The Brutal Truth About Bitcoin

By Eswar Prasad

     Illustration by Frank Augugliaro, Photograph via Getty Images


Bitcoin, the original cryptocurrency, has been on a wild ride since its creation in 2009. 

Earlier this year, the price of one Bitcoin surged to over $60,000, an eightfold increase in 12 months. 

Then it fell to half that value in just a few weeks. 

Values of other cryptocurrencies such as Dogecoin have risen and fallen even more sharply, often based just on Elon Musk’s tweets. 

Even after the recent fall in their prices, the total market value of all cryptocurrencies now exceeds $1.5 trillion, a staggering amount for virtual objects that are nothing more than computer code.

Are cryptocurrencies the wave of the future and should you be using and investing in them? 

And do the massive swings in their prices — nearly $1 trillion was wiped off the their total value in May — portend trouble for the financial system?

Bitcoin was created (by a person or group that remains unidentified to this day) as a way to conduct transactions without the intervention of a trusted third party, such as a central bank or financial institution. 

Its emergence amid the global financial crisis, which shook trust in banks and even governments, was perfectly timed. 

Bitcoin enabled transactions using only digital identities, granting users some degree of anonymity. 

This made Bitcoin the preferred currency for illicit activities, including recent ransomware attacks. 

It powered the shadowy darknet of illegal online commerce much like PayPal helped the rise of eBay by making payments easier.

As it grew in popularity, Bitcoin became cumbersome, slow, and expensive to use. 

It takes about 10 minutes to validate most transactions using the cryptocurrency and the transaction fee has been at a median of about $20 this year. 

Bitcoin’s unstable value has also made it an unviable medium of exchange. 

It is as though your $10 bill could buy you a beer on one day and a bottle of fine wine on another.

Moreover, it has become clear that Bitcoin does not offer true anonymity. 

The government’s success in tracking and retrieving part of the Bitcoin ransom paid to the hacking collective DarkSide in the Colonial Pipeline ransomware attack has heightened doubts about the security and nontraceability of Bitcoin transactions.

While Bitcoin has failed in its stated objectives, it has become a speculative investment. 

This is puzzling. 

It has no intrinsic value and is not backed by anything. 

Bitcoin devotees will tell you that, like gold, its value comes from its scarcity — Bitcoin’s computer algorithm mandates a fixed cap of 21 million digital coins (nearly 19 million have been created so far). 

But scarcity by itself can hardly be a source of value. 

Bitcoin investors seem to be relying on the greater fool theory — all you need to profit from an investment is to find someone willing to buy the asset at an even higher price.

Despite their high valuations on paper, a collapse of Bitcoin and other cryptocurrencies is unlikely to rattle the financial system. 

Banks have mostly stayed on the sidelines. 

As with any speculative bubble, naïve investors who come to the party late are at greatest risk of losses. 

The government should certainly caution retail investors that, much like in the GameStop saga, they act at their own peril. 

Securities that enable speculation on Bitcoin prices are already regulated, but there is not much more the government can or ought to do.

Bitcoin is not innocuous. 

Transactions are processed by “miners” using massive amounts of computing power in return for rewards in the form of Bitcoin. 

By some estimates, the Bitcoin network consumes as much energy as entire countries like Argentina and Norway, not to mention the mountains of electronic waste from specialized machines used for such mining operations that burn out rapidly.

Whatever Bitcoin’s eventual fate, its blockchain technology is truly ingenious and groundbreaking. 

Bitcoin has shown how programs running on networks of computers can be harnessed to securely conduct payments, within and between countries, without relying on avaricious financial institutions that charge high fees. 

For migrant workers sending remittances back to their home countries, for instance, such fees are a major burden. 

Technologies that make payments cheaper, quicker and easier to track would benefit consumers and businesses, facilitating both domestic and international commerce.

The technology is not without risks. 

Facebook plans to issue its own cryptocurrency called Diem intended to make digital payments easier. 

Unlike Bitcoin, Diem would be fully backed by reserves of U.S. dollars or other major currencies, ensuring stable value. 

But, as with its other ostensibly high-minded initiatives, Facebook can hardly be trusted to put the public’s welfare above its own. 

The prospect of multinational corporations one day issuing their own unbacked cryptocurrencies worldwide is deeply disquieting. 

Such currencies won’t threaten the U.S. dollar, but could wipe out the currencies of smaller and less developed countries.

Variants of Bitcoin’s technology are also making many financial products and services available to the masses at low cost, directly connecting savers and borrowers. 

These developments and the possibilities created by the new technologies have spurred central banks to consider issuing digital versions of their own currencies. 

China, Japan, and Sweden are already conducting trials of their digital currencies.

Ironically, rather than truly democratizing finance, some of these innovations may exacerbate inequality. 

Unequal financial literacy and digital access might result in sophisticated investors garnering the benefits while the less well off, dazzled by new technologies, take on risks they do not fully comprehend. 

Computer algorithms could worsen entrenched racial and other biases in credit scoring and financial decisions, rather than reducing them. 

The ubiquity of digital payments could also destroy any remaining vestiges of privacy in our day-to-day lives.

While Bitcoin’s roller-coaster prices garner attention, of far more consequence is the revolution in money and finance it has set off that will ultimately affect every one of us, for better and worse.


Eswar Prasad is a professor at Cornell University and a senior fellow at the Brookings Institution. His new book, The Future of Money: How the Digital Revolution is Transforming Currencies and Finance, will be published in September.

An inflation storm is coming for the U.S. housing market

By Jacob Passy


Fast-rising housing costs have helped to push inflation to a 13-year high. 

But the way that government statisticians track the price of consumer goods may be missing just how explosive home-price growth has been in recent months.

Housing costs rose by 0.4% between April and May, according to the latest edition of the monthly consumer price index released Thursday by the Bureau of Labor Statistics. 

Compared with last year, housing prices for renters and homeowners alike were up 2.2%.

Altogether, the rise in housing prices accounted for over a quarter of the overall increase in inflation in May, a reflection of how heavily government economists weight this spending category.

But if that 2.2% figure seems off based on your own experience of buying or selling a home, it’s not a surprise. 

Not everyone agrees on the rate of house-price growth.

The latest edition of the consumer price index indicated housing prices have risen 2.2% over the past year, while other reports suggest home prices are up more than 13%.

Other data suggested a much faster pace of home price appreciation and rental growth, well in excess of that level.

The most recent report from the Case-Shiller Home Price Index for March showed that home prices were up more than 13%, the largest rate of growth since 2005.

So how does the CPI calculate housing? 

Firstly, housing units themselves are not included the CPI market basket.

Secondly, rental data to establish how prices are changing are collected every six months. 

The calculations for most other CPI items are collected monthly or bimonthly.

“Like most other economic series, the CPI views housing units as capital (or investment) goods and not as consumption items,” the Bureau of Labor Statistics says. 

“Spending to purchase and improve houses and other housing units is investment and not consumption.”

“The cost of shelter for renter-occupied housing is rent. 

For an owner-occupied unit, the cost of shelter is the implicit rent that owner occupants would have to pay if they were renting their homes,” it adds.

The government pollsters ask homeowners: “If someone were to rent your home today, how much do you think it would rent for monthly, unfurnished and without utilities?”

And they ask renters: “What is the rental charge to your [household] for this unit including any extra charges for garage and parking facilities? 

Do not include direct payments by local, state or federal agencies. 

What period of time does this cover?”

Housing isn’t like other goods

“The rate of house price appreciation is not akin to inflation,” said Mark Fleming, chief economist at title insurance company First American Financial Services FAF.

For a start, housing is a very basic necessity. 

“Demand for shelter doesn’t go away — it just moves around,” Fleming said. 

In other words, if the price of airfares skyrockets 7%, as it did over the past month, families could decide against going on that summer getaway.

That choice isn’t so simple when it comes to housing. 

As the cost of shelter increases it can have a “cascading effect on extremely low-income renters,” said Andrew Aurand, vice president for research at the National Low Income Housing Coalition.

Research from Aurand’s organization has shown that more than 9.2 million “extremely low-income” renters are cost burdened by their housing, meaning they spent more than a third of their income on shelter-related expenses. 

Many of these households spend upwards of 50% on housing, leaving little money behind for other purchases.

The alternative for these households would be losing the roof over their heads. 

In recent years, that has become the reality for many Americans. 

A 2019 study released by the Trump administration estimated that more than 500,000 people sleep outdoors each night across the country, while many more couch surf or utilize shelters for unhoused people.

Meanwhile, for people who own their homes, buying a property isn’t the same as buying, say, a banana. 

Owning that banana won’t benefit you financially in the long-run, whereas with a house you can expect to see its value increase and to profit off that. 

But a home isn’t a pure investment asset like a stock — it’s a mix of both.

Home prices can rise both because the actual structure itself may be worth more — thanks to the rising cost of labor and lumber — but also because people see value in it as a capital investment.

Home prices can rise both because the actual structure itself may be worth more — thanks to the rising cost of labor and lumber — but also because people see value in it as a capital investment.

As a result, there can be a mismatch in the way economists or government statistician view rising home prices, and what that means to a consumer.

“In a market environment where prices are rising so quickly to buy a home the economist would say that’s the increase in the price of the capital good,” said Robert Dietz, chief economist at the National Association of Home Builders. 

“But to the buyer, it represents a higher cost of living.”

Why housing inflation is different

People experience inflation vis-à-vis housing differently to most other products, and that makes it a challenging to measure.

For the typical homeowner, their housing costs likely haven’t changed too much over the past year.

“If you have a fixed mortgage, on your home, year over year, how much does your cost of living in that home change? 

Not very much,” Fleming said. 

“The only things that change year over year are your escrows for taxes and insurance.”

Even with renters, the price of housing doesn’t shift higher or lower from month to month. 

That’s why the Bureau of Labor Statistics collects housing data more infrequently than most other items in the CPI basket of goods.

For renters and buyers, you encounter the changing cost when something about your living arrangement changed: When you move to a new home, sign a new lease or refinance your mortgage.

Americans need to know how much housing costs are rising or falling — not the least of which because residential real-estate makes up such a huge portion of the nation’s economy.

But Americans do need to know how much housing costs are rising or falling — not the least of which because residential real-estate makes up such a huge portion of the nation’s economy.

The government’s Consumer Price Index calculates the “imputed rent” — essentially the amount a homeowner is paying for their housing rather than paying a landlord.

If it did not do so, GDP would actually fall, Dietz said, “because money that would be a rental payment in the marketplace paid by a renter suddenly disappears.”

To bridge this challenge, the government relies on survey data to produce its estimates of housing costs for renters and homeowners. 

In renters’ cases, they are simply asked how much they pay for housing.

But owners aren’t asked what their mortgage payment is — after all, not everyone has a mortgage. 

Instead, that’s why they are asked to estimate how much they would be able to charge for rent to lease out their current home.

Government statisticians survey the same cohort of Americans periodically to produce their findings and track changes over time to estimate housing costs.

“Inflation and [changes in] housing prices have generally been matched up,” said Jonathan Needell, President and Chief Investment Officer of KIMC, a private real-estate investment company. 

He added that rising housing prices has “exceeded inflation in some circumstances.”

Some researchers have argued, however, that this approach can also understate and/or be slow to identify true inflation occurring in the housing market.

A new analysis from Fannie Mae FNMA, -0.83% showed that there is typically a lag between when home prices are actually rising, and when that price growth is reflected in inflation reports like the consumer price index.

The role played by COVID-19

The shifts in housing preferences and needs caused by the COVID-19 pandemic has also complicated our ability to gauge the effect of inflation in the housing market.

Wealthier Americans, many of whom suddenly found themselves able to work remotely, chose to move away from major cities into larger and cheaper homes in the suburbs, often saving money in the process. 

As a result, rental rates declined in pricier neighborhoods.

But in more affordable areas, rents actually increased. 

Americans who lost their jobs because of the pandemic rushed to find cheaper housing, pushing rents higher for the least expensive apartments and homes in the suburbs.

Those effects are beginning to dissipate, but will continue to weigh on official measures like the consumer price index given the time lags that occur.

Americans who lost their jobs because of the pandemic rushed to find cheaper housing, pushing rents higher for the least expensive apartments and homes in the suburbs.

So is housing quickly becoming more expensive? 

The answer, economists agree, is yes. 

First American Financial Services has its own measure, the Real House Price Index, which compares nominal-price gains with Americans’ ability to afford to purchase a property based on the prevailing interest rates and household income.

For a period of time between 2018 and the beginning of 2020, the Real House Price Index was falling, because Americans’ buying power was rising faster than home prices, Fleming said. 

That’s not the case anymore.

“Deflation has turned into inflation, not because interest rates have gone up — they’ve only gone up a little bit — but because house prices are just crazy,” Fleming said.

The reason home prices are rising so fast is fairly simple. 

After the Great Recession, home-building activity all but drew to a standstill as the construction industry worked to recover.

As a result, the construction of new homes did not keep pace with population growth and the formation of new households.

That left the housing market with a serious shortage of homes, just as millennials have begun getting married and having kids — traditional hallmarks of home-buying interest.

With the pandemic, the shift to remote working and low interest rates have only exacerbated things.

The primary solution to address runaway inflation in housing will be to build more homes — something that’s easier said than done. 

“Some of the challenges that we face on the supply side of the residential construction industry are going to persist well into 2022,” Dietz said.

Those challenges run the gamut from the high cost of lumber to the lack of skilled workers to complete construction projects. 

Another factor: Zoning regulations across the country prevent the construction of more dense housing in many cities, effectively driving up home prices and rents in the process.

Finally, new-home construction alone won’t make matters easier for all Americans. 

Because of the high costs, it’s easier for builders to construct more expensive homes, even though the demand and competition is strongest for entry-level properties.

Over time, that increased concentration in the bottom-tier of the housing market is driving up prices for those who can least afford it.

“There’s this argument that if you just build more supply to meet the demand, it will eventually help extremely low and very low-income renters,” Aurand said. 

“But the market is not going to adequately serve mostly extremely low-income renters.”