Elements of the counter-intuitive rates-and-inflation idea may deserve some scrutiny
The idea that the Fed eral Reserve’s steep interest rate rises actually made U.S. inflation stickier has more merit than it first sounds - not least among U.S. central bank researchers themselves.
But with U.S. markets running scared of yet another hot consumer price inflation report for March, and with rents and shelter costs key aggravators of that miss once again, elements of the counter-intuitive rates-and-inflation idea may deserve some scrutiny - and calm investors down a bit too. The first was a discussion paper by economists Daniel Dias and Joao Duarte that was published by the Fed’s Board of Governors in 2019, less than a year before the onset of the COVID-19 pandemic.
And reinforcing the peculiarity of the response of rent, the paper showed all other main components of the consumer price index either decline in response to tighter monetary policy or are not responsive.
It argued that a one-percentage-point increase in the Fed’s policy rate would reduce rental inflation by 3.2 points - and headline PCE rates by half a percentage point.That would suggest the full effects on rent from the Fed’s initial rate rises in 2022 won’t be felt until the end of this year - even though presumably it kicks in sharply from there given that the Fed’s policy rate is now 5.25 percentage points higher than it was in March of 2022.
Fed Pce Rent United States Response Week Rate Jpmorgan Asset Management Michelle Bowman San Francisco Fed
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