Powell: ‘The best thing we can do for housing is to succeed in getting inflation down to 2%’

As expected, Federal Reserve Chairman Jerome Powell did not set a timeline for lowering interest rates during his semiannual monetary policy report to Congress on Tuesday morning when participants complained about the effects of a tightening monetary policy in the housing market. 

Powell indicated that Fed officials are not there yet, but suggested a better balance of inflation and employment in the U.S. economy. Most monetary policy watchers – about 70% – project a reduction in rates for the Fed meeting in September, according to the CME Fedwatch Tool. 

Powell said during the congressional hearing that reducing the federal funds rate target range will be appropriate once Fed officials have gained greater confidence that inflation is moving sustainably toward the 2% target. 

Incoming data for the first quarter of this year did not support such greater confidence, he said. One caveat: “The most recent inflation readings, however, have shown some modest further progress, and more good data would strengthen our confidence that inflation is moving sustainably toward 2%.”

Regarding the labor market, Powell said that the U.S. economy has a “strong labor market” but not an “overheated labor market,” which “appears” to be back in balance and is not a source of broad inflationary pressures now. 

“If we loosen policy too late or too little, we could hurt economic activity. If we loosen policy too much or too soon, then we can undermine the progress on inflation. So, we’re very much balancing those two risks,” Powell added. 

Affordability challenges 

High housing costs and mortgage rates were mentioned several times during the congressional hearing, with members saying these are concerns of their constituents at the moment. 

“Keeping rates too high for too long threatens workers’ paychecks while keeping other costs high – particularly housing,” said Senator Sherrod Brown (D-OH), the chairman of the Senate Banking, Housing and Urban Affairs Committee. “It is no surprise that since the Fed began raising rates, the amount of income families need to qualify for a mortgage has nearly doubled.”

Brown added that higher interest rates make the housing supply shortage “worse, not better.” According to him, the U.S. needs more housing construction, but higher rates lead to the opposite and “particularly make it harder for multifamily construction to work financially.” 

Powell agreed that the COVID-19 pandemic created new distortions in the housing market, and the Fed’s tighter policy is affecting the housing sector. 

“But I would also say the best thing we can do for housing is to succeed in getting inflation down to 2% on a sustainable basis so that rates can come down so that the housing market can get back to what was the pre-pandemic normal, which is still a housing shortage,” Powell added.  

Basel III Endgame rules 

The Basel III rules (aka the Basel endgame) were criticized by participants during the congressional hearing. They significantly increase bank capital requirements and, if implemented, affect the mortgage industry.

Ranking Member Tim Scott (R-S.C.) said the proposal is an example of “overregulation” that would “cost millions of Americans their chance to own a home.” It would “force more money to the sidelines of the greatest economy on the planet and out of the hands of first-time homebuyers,” he added. 

“We need transparency in your rulemaking process, as this enormous proposal lacks any form of clear justification…  That’s why I believe that it is absolutely necessary to have a complete re-proposal of Basel III Endgame.” 

Powell, however, said that over the last several months, the Fed has held a series of discussions with the other bank regulatory agencies – the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC) – about potential changes to the original proposal. 

“I’m pleased to say that we’ve made quite a bit of progress on those and are very close to agreeing on the substance of those changes. And I can’t really be specific because nothing is agreed until everything is agreed,” Powell said.

According to Powell, it has been a practice to put a revised proposal out for comment when there are broad material changes for some period, probably 60 days. The expectation is to have final recommendations at the beginning of next year.

In reaction, the Mortgage Bankers Association (MBA) president and CEO, Bob Broeksmit, said in a statement that the association agrees “wholeheartedly with Fed Chair Powell’s comments that it is ‘essential’ to re-propose the flawed Basel III Endgame proposal.”

According to Broeksmit, “certain provisions of the proposal would harm the U.S. economy, diminish mortgage credit availability – especially for low- and moderate-income homebuyers – and have detrimental impacts to the broader single-family housing and commercial real estate finance markets.”

Broksmit called on the Fed, FDIC and the OCC “to scrap this proposal and conduct a rigorous quantitative analysis – with ample time for stakeholder feedback – before the re-proposal of any new capital framework.”