$600B Fed Stimulus: A Boost, but Inflation Lurks

By Robert Freedman, Senior Editor, REALTOR® Magazine

The Federal Reserve’s move to boost the economy with $600 billion in U.S. Treasury bond purchases earlier this week helped ignite the stock market and could also help real estate in the short term if businesses follow suit by adding jobs.

NAR Chief Economist Lawrence Yun told REALTORS® at the 2010 Conference & Expo today that job growth is key to getting home sales back up to where they should be based on historic norms. Although housing markets are steadily improving and prices are stabilizing, home sales remain at levels last seen in 2000, when the U.S. had 30 million fewer people.

Yun says weak consunmer confidence, which is a function of continuing high unemployment (about 9.6 percent currently), is behind the lag, so anything that can boost job growth could help home sales.

But the latest Fed stimulus could come with a cost, says Federal Reserve Governor Thomas Koening. Joining Yun at the REALTORS® conference to talk about the residential housing market, Koening said continued efforts to stimulate the economy could spark inflation, particularly with the federal budget deficit already at historically high levels. Koening was the only Fed governor to vote against the new stimulus.

Although inflation remains quiescent, and indeed some economists are even talking about the risks of the U.S. moving into a period of Japanese-styled deflation, there are worrisome signs of inflationary pressures building, says Yun.

If you focus on the consumer price index (CPI), which is up only 1.1 percent from a year ago, then inflationary signs are absent, he said. But Yun thinks the housing component of CPI, which is up only 0.2 percent in the last year, is what’s keeping inflation in check.

When you focus on producer prices, which are up 4 percent for finished products and more than 20 percent for crude products (products in the earliest stages of production) and commodities, the picture looks very different.

With nothing to change these trend lines, these price increases are likely to show up in consumer prices at some point in the future. And once they do, the increases will be hard to reverse. “Inflation is like toothpaste,” Yun said. “Once it’s out of the tube, it’s hard to put back in.”

Bottom line: The latest Fed stimulus could in fact spur job growth and therefore give home sales a boost. But will the cost be higher inflation down the road? If so, that can put home buying out of reach to households who have to contend with higher interest rates.

Robert Freedman

Robert Freedman is director of multimedia communications for the NATIONAL ASSOCIATION OF REALTORS®. He can be reached at rfreedman@realtors.org.

More Posts

No Responses

ADD YOUR COMMENT