- Signs point to prices of homes, cars, and furniture easing in the coming months.
- Some economists say that means the Federal Reserve doesn't need to squash jobs to cool inflation.
Home prices across the country are finally showing signs of cooling, and cars and furniture could be next.
This should be good news not only for shoppers, but for workers looking to join the "Great Resignation." Cooling prices might provide less reason for the Federal Reserve to continue its bold campaign to raise interest rates and slow the economy.
But some economists and investors fear the Federal Reserve — despite these signals of easing prices — will push full steam ahead, causing unnecessary "pain" for American workers.
It did just that on Wednesday, increasing interest rates by another 0.75% to make borrowing more expensive and squash demand. In comments following the decision, Fed Chair Jerome Powell said there is a "very high likelihood" that the US will experience slowing economic growth, which could translate to nearly 1.3 million lost jobs over the next year and a half. Powell also expects a "difficult" housing market correction, which would further decelerate home prices.
Some economists worry the self-inflicted downturn isn't necessary.
"Inflation is coming from continued supply chain bottlenecks, the energy prices, dealing with the Russian invasion of Ukraine," Elise Gould, an economist for the Economic Policy Institute, told Insider. "There's still some mismatch. I think that some of that's going to come down on its own, so I think the Federal Reserve doesn't have to act so aggressively."
"It is inexcusable, bordering on dangerous for the Fed to be raising rates so aggressively," former Fed economist Claudia Sahm wrote on Twitter Thursday. "Is 4 percentage points on US core inflation really worth destabilizing Europe and pushing us into a global recession? No, it is not."
"If the Fed keeps this up, they are going to have a serious recession and people will lose their jobs," said billionaire real-estate investor Barry Sternlicht, adding that the Fed "is attacking the economy with a sledge hammer [when] they don't need to."
"Will raising interest rates lead to more oil, lower prices of oil, more food, lower prices of food?" said Nobel Prize-winning economist Joseph Stiglitz. "Answer is clearly not. In fact, the real risk is it will make it worse."
"The real worry in my mind is," he added, "will they increase interest rates too high, too fast, too far?"
The housing market — which is very responsive to interest rate increases due to their quick impact on mortgage rates — has already seen new home sales slow since the Fed began raising rates this spring. As these rate increases trickle through the rest of the economy, some economists say the Fed's current pace of rate hikes might not be required. If the central bank disagrees — and is wrong — Americans may have to say an unnecessary good-bye to the low unemployment and record job openings economy many have benefitted from over the last year.
Americans may not have to experience economic "pain" for inflation to cool
According to Gould, two of the main reasons for inflation are pandemic supply chain delays and outsized demand for certain goods, both of which will work themselves out independent of interest rate hikes.
"There were supply chain bottlenecks from things like not having the right parts for cars, and then people bought their cars," Elise Gould, an economist for the Economic Policy Institute, told Insider. "There were a lot of people buying goods — they're not going to keep doing that. You're not going to buy another couch every year. You're not going to buy another car every year. You're going to see some of those prices come down."
As fears of the pandemic ease and consumers continue to shift their spending from goods to services, she believes the reduction in demand should ease pricing pressures across the economy in the months ahead.
For now, however, prices of goods continue to rise. In August, prices for new cars and furniture rose 0.7% and 0.5% month-over-month, with both seeing double-digit increases compared to the prior year period. While supply chain issues may keep the prices of minivans and couches from dropping significantly, Gould expects some cooling in the months ahead — though others believe prices could still rise further.
If a cooling of prices does take hold, it could eventually spread beyond cars and furniture to other areas of the economy. While inflation may not be "transitory" in quite the way some economists predicted, Gould still believes it would fall without substantial action from the Fed.
And if the Fed acts too swiftly, Gould says "it may be very hard to reverse out of that" and avoid the potential consequences of a more severe downturn. Millions of people could lose their jobs, and those that retain them could "lose some of that leverage to be able to build up their wages, because they're less scarce," she said.
While the Federal Reserve is aware of these risks, Powell has said some of this "pain" is needed to slow inflation. But if inflation is poised to fall on its own in the coming months — which Gould expects to be reflected in upcoming reports — then some of this "pain" is arguably unnecessary.