Today we're going to talk about lag and why single instances
like federal funds, rate increases do not show up instantaneously.
So if you're like me, I'm very frustrated with the continued high prices
and I have no idea what the Fed's going to do because
their target inflation rate is 2%.
We're well over that now.
As just released yesterday, the newest inflation numbers.
So why is this taking so long
and when is this nonsense, this high inflation, high prices?
When is this going to stop?
I know none of us have patience,
but we really do have to look at what I call lag back.
Mr. Fuller talks a lot about lag as he's talking about precession.
I thought this was a great graphic because we can see what happens
when you drop a pebble in the water.
The core spawning rings that we have here.
That's lag.
There's lots of definitions of lag,
but we're going to talk today about inside and outside lag.
So there's a lot of criticism what the Fed about inside lag.
And that really was
when the government or central bank responded to the shock in the economy.
And we all know really high.
I think there are around 8.5%
when we saw the very first rate increase in March of 2022.
So that's what we call inside lag.
That's when the Federal Reserve decided to increase rates for the first time.
Now, as you can imagine, there's also outside lag,
but the amount of time it takes for the government or central banks actions
from up here in the form of either monetary or fiscal policy
to have a noticeable effect on the economy.
And as you know, we've only moved a few percentage points
off of the inflation number.
When we started in the first quarter of 2022, it hasn't moved much.
So let's take a look at this in a little more detail.
In March of 2022, the Federal Reserve raised the federal funds rate
because inflation at that time was 8.5%.
But as many of you know, inflation continued to go up.
So the actual federal funds rate increase did not do much initially, and inflation
rose up to 9.1% in just a few months to June of 2022.
So in June of 2022,
the Federal Reserve had raised the federal funds rate three times and inflation
what up there in that period of time, Fast forward in all of 2022,
as you can see, the Federal Reserve raised the federal funds rate
seven times very 2022, and it barely moved the needle.
As far as inflation goes, though, where are we heading
and why is it this working?
It's all a result, a lag which I'm going to talk about in the next slides.
So as we make predictions for 2023 and 2024,
I think it's very important that you take a look at what the Federal Reserve's goal
is and it remains at 2%, as you can find on their very own website.
As we know, they increase the federal funds rate over seven times in 2022.
It barely made a dent.
People are still frustrated with high prices
as they struggle just to live day in, day out.
So I wanted to talk a little bit about what the Federal Reserve's mandate is.
As you can see from their own website,
one of their goals and objectives is full employment and stable pricing.
Right now we do not have stable pricing.
We have okay employment, at least as it's being reported,
either BLS or the Bureau of Labor Statistics.
More on that later.
But it's important to know what the Federal Reserve is watching.
Primarily, they're watching three different categories.
As I've explained here,
they're looking at goods which excludes volatile food and energy costs,
which, as you can see right now, the Federal Reserve is under
a little bit of attack.
They're housing, which includes rents, which we're going to discuss,
and the cost of homeownership and services,
which excludes housing such as auto insurance, pet services and education.
Those are the three primary categories that we're going to focus on next.
One of the issues inside of here are, of course, labor and wages,
which has also gone up.
And for example, if you're renting a hotel room somewhere,
you're probably seeing the higher hotel prices, because what's happening
is the operators are pushing those kinds of expenses
down to the consumer, which is showing up in the hotel prices.
So all of that's in here as well.
And as you know, I did in other videos, one of the things
the Federal Reserve is prepared to deal with is higher unemployment.
In fact,
they've talked about pushing unemployment from 3.5 to 4.5,
which would take pressure off some of these wage issues and,
of course, tamper down inflation. Not necessarily
good for the normal consumer, but that is what they're planning.
Obviously, this is a basic math issue.
If unemployment goes from three and a half to four and a half,
there's going to be more people looking for the same amount of jobs.
And of course, wages should go down as a result of that,
just basic supply and demand.
Same thing on the prices as the cost of money goes
up, people consume less and therefore prices should fall.
Those are two levers that the Federal Reserve
is using right now to try to control some of these high prices.
What I thought was very interesting, and you might not know,
is that shelter or housing as determined in the prior slide,
makes up nearly a third of the basket of the CPI inflation.
Of course, CPI is the consumer price index or those of you
don't know, and 40% of the basket for core CPI
that excludes the volatile food and energy components
because housing is 40% of the CPI
and there's lots of opinions we're going to talk about next
about what's happening in residential real estate markets.
And I know all of you have different opinions on where you are specifically,
but there's lots of conflicting data right now on real estate, home
prices and rents as we go into 2023 and what happened in 2022.
What's more potent for you and understand as if home prices do go up
and interest rates continue to be high,
that's actually good for the rental market,
which could actually create inflation on the rental side.
And it could also work in the exact opposite as single family
home prices go down and interest rates go down,
it actually hurts the rental market, as you would expect.
As you can see, I tried to pick a more credible resource,
the National Association of Realtors, somebody who was actually selling homes,
that was actually predicting where prices were going to be and where they were.
And this Lawrence Young, the cheap economists
of the National Association of Realtors, says inventory remains tight.
Prices continue to rise
nationally, with nearly 40% homes still commanding full price.
Now, of course, that doesn't mean what the other 60% are actually doing either.
He's basically stay in the middle of the road, as you can see.
He also says here
there's a chance that half the country may witness price increases.
The other half will see price drops.
We're seeing all kinds of information around this.
Jeremy SIEGEL at Wharton says he expects home prices
to slide up to 15% or somewhere between ten and 15%.
And then Mark Zandi, who is with Moody's, who, of course,
these are not real estate people. These are economists.
He's saying at least a 10% decline in current market.
And he said most of the clients will happen sooner than later.
And house prices will fall 20% if there's a typical recession.
I actually tend to agree more with Jeremy SIEGEL and Mark Zandi,
as we're starting to see even in Phenix here, lots of price decreases and people
pulling their homes off the market, even though all of you are going to say
and it's true, we are in the middle of a shortage of housing, are still seeing
prices decline as a result of these higher interest rates.
We're seeing less mortgage applications and we're seeing less sale.
That, of course, is building up inventory in many, many markets
with the exception of some of the hotter markets.
So those of you in Florida are going to completely disagree with this video.
So I think it's important to take a look at what's actually happening.
If you really drill down
and you start to look at the median price of housing as the lag
has affected from the interest rate increases from the federal funds, rate
increases from the Federal Reserve, we are definitely seeing a decrease
in the residential housing prices year over year, month over month.
Not always in specific markets are definitely
some that are doing well, but the majority
most of the markets across the country are experiencing declines.
On the same token, we're also seeing rental prices
go up, even though we've seen some flattening.
I'm going to talk about that in a minute.
But this should not be surprising to you.
The reason I bring these two up is because, as we know,
these two components make up nearly a third of the CPI or the inflation number
that the Federal Reserve decides what to do with the federal funds rate in 2023.
So if rental prices are going to go up 3 to 4%, that's inflationary.
If housing prices go down, that, of course, is deflationary.
So they're going to look at all of this together and then make their decisions
as nearly 40% of the basket for CPI is made up of shelter.
As a result, even small increases in rent or home prices can in
principle have noticeable effects on overall inflation.
And that's what we're trying to say.
So those are you are advocating that residential housing prices are up?
Well, it's actually going to trigger more federal funds increases.
And those of you who are in the rental price cap, that's
actually potentially going to trigger more increases in the federal funds rate.
So either way, it affects shelter and cost of living for the common person.
That is the point.
Now, let's dig into this, because that's an area, of course,
you guys know I have a lot of experience, though.
We look at a many different scenarios and I pulled a couple here.
Let's look at Yardi.
So this is a service that I currently have and I pay for monthly, as you can see.
Yes, rents are projected to go down, but let's take a look
at how they're actually revised from 3.5% to 3.1%.
So what that means is, yes, there's downward read growth,
but only based on the 3.5% projection that they're already had.
And 3.1% is still inflationary in the eyes of the Fed.
So when you start to see these articles about rents for 2023,
you can see experts say rent prices for 2023 are cooling down.
This is true, but why don't we take a look at the small print?
Well, renters pay more in 2023.
Short answer is yes.
Rents are still going to continue to grow in 2023
because people cannot afford these houses at these high interest rates
and they're actually being pushed into the rental side of the equation.
So now the real question is how long is all of this going to take?
And I thought this was a great example of lag.
We started with lag and now we're going to talk about
how long is it going to take
for these federal funds increases and interest rate increases
to actually lower inflation, because we're certainly not seeing much of that now.
So this is a great example of lag, as stated by the president
and CEO of the Federal Reserve Bank of Atlanta.
And there's a lot in here that you guys should be able to read.
What he's basically saying is things happen gradually.
A larger body of research tells us it can take up to 18 months to two years
or more or tighter monetary policy and materially affect inflation.
And you may be wondering, why is this taking so long?
Well, this is the CEO, President of the Federal Reserve Bank of Atlanta,
saying that it's going to take 18 months to two years.
Now, there's all kinds of information on the Internet about lag
and how long does it take when you increase interest rates.
And this is why there's so much criticism on the chairman, Jerome Powell,
or what we call that inside lag on when they actually responded.
Because most people know that we're looking at 18 months to 24 months
or this to actually start to correct itself.
If you Google lag and you start to take a look at
how long does it take interest rates to actually affect inflation,
you will see that in many cases, we're looking at a year up to three years.
And that is a large body of people,
as pointed out by Rafael Bostic,
president and CEO of the Federal Reserve Bank of Atlanta.
We all know that we've had seven interest rate increases in 2022,
and we all know that this could be a year to three years.
We'll use the Federal Reserve's own estimate
that this would actually put us at about halftime.
So everything that's happened so far, we should be at about halftime.
If you measure it from the very first rate increase
in March of 2022 or somewhere around eight or nine months.
And of course if we're looking at 18 months,
then we should be at about halftime like any kind of football game.
When you go into the locker room and it is halftime, you have a strategy
for the second half and now we're going to talk about that now.
So here's where we are today.
We increased rates seven times in 2022.
We have targeted inflation as shown on the Fed's own website at 2%,
and we have inflation that still needs to go anywhere from 4
to 5% just to hit the Federal Reserve's target.
So in 2023, I expect the interest rate to continue to go up.
The Federal Reserve has many meetings in 2023.
They meet on the 31st of January, the 21st of March, the 2nd of May,
the 13th of June and the 25th of July, I believe that they're going to continue
to raise the federal funds rate anywhere from a quarter to a half point
through 2023 to continue to try
to hold the resistance on the increase pricing as it relates to housing,
which should then move the home prices even further down
as they already started in 2022.
On the commercial side, we're already seeing at least a 1% increase
in the cap rate or capitalization rate, at least a 20% discount
on the commercial prices as a result of the higher cost of debt.
As it relates to the federal funds rate, I predict that it will continue into 2023.
And the third thing with regard to rents, I believe that as interest rates continue
to rise, it's actually going to create
higher mortgage payments for a lot of people.
Even though we might see home prices come down,
then it's actually going to drive
a bigger gap between the mortgage price and the rent price,
and it's going to force
more people into the rental market and it's going to actually have somewhere
between a three and 4% nationally increase in annualized rents.
So in summary, I expect most of 2023 to be very close
to what we just experienced in the fourth quarter of 2022, with one exception.
I believe we're definitely going to go into a pretty good recession
because I've been digging into a little bit of data around unemployment
and there's a big disconnect between the BLS, the Bureau of Labor
Statistics, information on unemployment and the household survey,
a discrepancy of almost 1 million people.
Please tune in on the 16th for our happy hour because we've got data.
SAMUELSOHN Who's going to talk about that exact issue, about
the discrepancy in the unemployment rate and as it relates to a recession?