Federal Reserve Chairman Jerome Powell's semi-annual monetary policy report to Congress on Tuesday morning noted participants expressed frustration over the impact of monetary tightening on the housing market, but, as expected, did not offer a timeline for interest rate cuts.
Powell signaled a better balance between inflation and employment in the U.S. economy, though he said Fed officials aren't there yet. A majority of monetary policy watchers, about 70%, expect a rate cut at the September Fed meeting, according to the CME FedWatch tool.
Powell told a congressional hearing that it would be appropriate to lower the target range for the federal funds rate once Fed officials become more confident that inflation is moving sustainably toward the 2 percent goal.
He said first-quarter data did not support that increased confidence, but cautioned, “However, the latest inflation measures indicate some further progress, and better data would strengthen our confidence that inflation is moving sustainably toward 2 percent.”
On the labor market, Powell said the U.S. economy has a “strong labor market,” but not an “overheated labor market,” that the labor market appears to have “rebalanced” and is not currently a source of widespread inflationary pressures.
“Easing policy too late or too little could harm economic activity, while easing too early or too much could hinder inflationary progress. So we are balancing these two risks very carefully,” Powell added.
Affordability Challenges
Rising housing costs and mortgage rates were mentioned multiple times during congressional hearings, with lawmakers saying they are concerns for constituents at this time.
“Keeping interest rates high for extended periods of time threatens workers' paychecks while keeping other costs, like housing, high,” said Sen. Sherrod Brown (D-Ohio), chairman of the Senate Banking, Housing and Urban Affairs Committee. “It's no surprise that since the Fed started raising interest rates, the income households need to get a mortgage has nearly doubled.”
Brown added that rising interest rates would “make it worse, not better” than the housing shortage. The U.S. needs more homebuilding, he said, but higher interest rates would have the opposite effect and “make multifamily construction, in particular, less financeable.”
Powell agreed that the COVID-19 pandemic has created new distortions in the housing market and that the Fed's tightening policy is impacting the housing sector.
“But I would also say that the best thing we can do with respect to the housing market is to succeed in bringing inflation down sustainably to 2%, lower interest rates and get the housing market back to pre-pandemic normal, which is still a housing shortage,” Powell added.
Basel III Endgame Rules
The Basel III rules (also known as the Basel Final Act) were criticized by participants in congressional hearings because they would significantly increase capital requirements for banks and, if implemented, would impact the mortgage industry.
Senator Tim Scott, a Republican, said the proposal was an example of “overregulation” that would “deprive millions of Americans of the opportunity to own a home,” adding that it would “drain even more money from the greatest economy on earth and take it out of the hands of first-time homebuyers.”
“This enormous proposal completely lacks a clear justification and we need transparency in the rulemaking process. That's why I believe a full re-proposal of the Basel III endgame is absolutely necessary.”
But Powell said that over the past few months the Fed has had a series of discussions with other bank regulators, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency, about possible changes to its original proposal.
“We've made significant progress on these issues and I'm happy to say we're very close to agreeing on changes, and I can't get specific because we can't agree on anything until everything is agreed,” Powell said.
When broad, significant changes are made, it's customary to publish proposed revisions for comment for a period of time, perhaps 60 days, Powell said, with final recommendations expected early next year.
In response, Bob Broeksmit, president and CEO of the Mortgage Bankers Association, said in a statement that the association “fully agrees with Fed Chairman Powell that it is 'essential' to re-propose the flawed Basel III endgame.”
“Certain provisions of the proposal would adversely affect the U.S. economy, reduce the availability of mortgage financing, particularly for low- and moderate-income homebuyers, and adversely affect the broader single-family residential and commercial real estate finance markets,” Broeksmit said.
Broksmitt called on the Fed, FDIC and OCC to “allow sufficient time for stakeholder feedback and conduct rigorous quantitative analysis before withdrawing this proposal and re-proposing a new capital framework.”