The Fed’s efforts to fight housing inflation by raising interest rates have backfired
The Federal Reserve’s “only method” of fighting inflation by raising interest rates has “backfired,” CNBC’s Jim Cramer said Wednesday.
In their fight to curb housing inflation in particular, the Fed has been trying for months to not only slow inflation, but reduce the value of homes and the cost of rent, Cramer continued.
The reality is different, Cramer said. “In fact, the rate hikes, at this point, are driving up the price of shelter,” Cramer said.
Cramer used a hypothetical real estate developer as an example, which appears to benefit from higher rents in a particular area. Typically, Cramer said, developers will go to a bank (most likely a regional one) to secure financing.
But to a glut of money supply from the pandemic, Cramer said, banks parked cash in longer-dated bonds that make it difficult to make loans to that developer. Now that interest rates have been raised, Cramer continued, these banks cannot sell these long-dated bonds without realizing a huge loss: a situation similar to the collapse of Silicon Valley Bank.
The interest rate hikes lead to tighter lending standards, which make it harder to get a loan from a bank, which in turn limits housing supply, Cramer said, meaning home values remain high and rents don’t fall as much as the Federal Reserve would like.
“They’ve defeated themselves,” Cramer said. Federal Reserve Chairman Jerome Powell is a “cautious” boss, Cramer said, but that may not be enough to stay the Fed’s hand. That’s because more hawkish Fed officials want to keep raising interest rates, Cramer said, whether they’re really necessary or not.
