Powell’s Precarious Path

I live in an area of North Carolina that used to be a hot housing market. Just months ago, neighbors put their homes on the market and sold them almost immediately, usually near or even above the asking price, sometimes for cash. Recently, though, the quick sales stopped. Two neighbors put houses up for sale a few months ago and they are still sitting there unsold.

photo by James O’Shea

The usual reasons – crime, noise, bad location – don’t explain the poor sales results. I live in a safe cluster of nicely appointed homes with gracefully landscaped yards. There’s little crime; the location is excellent; neighbors are nice; desirable transportation options proliferate and, from everything I read, buyers should be plentiful given the housing inventory shortage.

Perhaps our surroundings explain the lack of buyers. Million-dollar mansions surround our more affordable homes. Do real estate agents steer clients looking for affordable housing away from our neighborhood because they think it’s filled with houses that only rich people can afford? Some I’ve talked with expressed surprise when discovering the affordability of our neighborhood.

I don’t really think that’s the problem, though. The policies being pursued by Jerome Powell and U.S. Federal Reserve Board are the real reason For Sale Signs linger in my neighborhood. Admittedly, my personal observations about Federal Reserve policy are anecdotal.

My views also lack the legitimacy of economists who pore over reams of economic data when analyzing the impact of the Federal Reserve and its ability to jack up interest rates. But I’ve watched Federal Reserve policy for years both as a newspaper reporter and editor, including a stint as the chief economic correspondent for the Chicago Tribune in Washington D.C.

Reporters develop a sense of when things are not going well and, right now, I feel in my bones that the Federal Reserve should ease off, or even ponder a reversal of the rate increases that I think are starting to slow the economy more than the economic data suggests.

In the past, I’ve been supportive of Powell and his drive to tame inflation. A mindset that anticipates rising prices is a dangerous thing for an economy and can easily become a self-fulfilling prophecy in which workers and consumers inject rising prices into their purchase practices and wage demands. The legendary Federal Reserve Board Chairman Paul Volcker shoved the economy into a near depression in the 1980s during his campaign to vanquish the inflationary psychology that led to double digit inflation and interest rates. With a string of rapid, quarterly rate increases, Powell and the current board seem to be taking a page from Volcker’s playbook.

I think the Federal Reserve and Powell did the right thing when inflation began to aggressively surface over the past two years. But he may now be treading too far down the trail that Volcker blazed. The economy and financial markets have changed significantly since the cigar-chomping Volcker sat at the Federal Reserve desk in Washington.

Volcker was dealing with record high inflation rates driven mainly by salary demands, chiefly in the high-wage goods producing industries, such as manufacturing, construction, and automakers, all of whom borrowed lots to money to finance their operations. In fact, goods producers in 1982, just after Volcker started running the Fed, accounted for thirty percent of employment in America. Yet they suffered ninety percent of the job loses triggered by Volcker’s policies. Powell wrestles with an economy in which goods producers now account for only about twenty percent of the workforce. The services industries, which account for the other eighty percent, are sensitive to interest rate increases, but not on the same scale as, say, manufacturers. That’s one reason that the economy is not retracting as it did under Volcker as the Federal Reserve raises interest rates. That’s not the only new challenge Powell and the current Federal Reserve face, though.

Unlike in the Volcker era, the American economy is emerging from a record stretch of extraordinarily low interest rates that are still having an impact on everything from the banking to the housing markets. I have one of those low interest rate mortgage loans, and hardly a day goes by when I don’t get an email or phone call from some bank or lender trying to “help me” refinance my mortgage loan.

The appeals are packaged in slick brochures that tell me how I can raise money at a lower rate of interest to pay off high-interest credit card debt, take a dream vacation or build an addition to my house. But here’s the real motivation behind the appeals: The banks and their financial industry partners are desperate to make those low-rate loans disappear from their balance sheets before they must cough up some cash to increase their reserves. Why? Because the Federal Reserve’s policies devalue low-interest rate loans carried on their books, and the longer the higher interest rate policies linger, the greater peril lenders face.

Many banks also are now paying depositors more in interest that their loan portfolios are earning. I’m not even going to get into the problems they face in commercial loan markets thanks to empty office space, a legacy of the Covid pandemic. Powell and his colleagues at the Federal Reserve need to start backing off before they have more trouble with banks like the recent collapse of the Silicon Valley Bank plus a recession triggered by their interest rate policies.

Volcker once told me and a colleague that the depth of the recession triggered by his policies surprised him. Yet he didn’t waver in breaking the back of inflation. The trouble was he also broke the backs of many working people in the recession he helped create. Powell and the current Federal Reserve risk making a worse mistake. I’m also starting to see more vacant tables at local restaurants. The central bank should ease off before the For Sale Signs spread far beyond my neighborhood.

—James O’Shea

James O’Shea is a longtime Chicago author and journalist who now lives in North Carolina. He is the author of several books and is the former editor of the Los Angeles Times and managing editor of the Chicago Tribune. Follow Jim’s Five W’s Substack here.