Over the past few years, the Federal Reserve's response to inflation has been a subject of intense scrutiny and criticism. Many believe that the Fed's delayed action in tackling inflation exacerbated the economic challenges. In March 2020, the federal funds rate was dramatically reduced to nearly 0% due to COVID-19. However, by March 2022, inflation soared to 8.5%, prompting the Fed to increase the federal funds rate by 75 basis points. Despite these measures, inflation peaked at 9.1% by June 2022. Since then, the Federal Reserve has raised the federal funds rate 11 times, reaching a 5.25-5.5% benchmark rate, the highest in 22 years.

Ed Coulson, Director of the Center for Real Estate at the University of California-Irvine, in a recent interview with the Los Angeles Daily News, suggested that the fundamental issue lies in how inflation is measured, particularly criticizing the use of the consumer price index (CPI) as a macroeconomic policy advisor. The CPI, which heavily weighs rental prices, is based on a market basket of goods and services, including prices for approximately 80,000 items. Coulson argues that the CPI's reliance on current rent prices, which reflect leases signed many months prior, results in a sluggish and outdated reflection of the housing market.

Coulson advocates for a more accurate method of tracking rental inflation, suggesting the use of new leases signed on vacant units. This approach, he believes, would provide a more timely and accurate reflection of rental market dynamics. Recent trends have shown a decrease in rental prices since August, indicating a shift towards rental deflation.

The big question now is when the Fed will act to reduce interest rates. Most economists predict a decrease in rates between April and June of the next year. The Fed's decision will likely depend on two scenarios: the onset of a recession or a reduction in inflation rates to around 2%, coupled with a stable economy. However, any reduction in rates could further inflate housing prices as demand increases, presenting a double-edged sword for the housing market.

In conclusion, while housing prices remain high and sales activity is dormant, the Federal Reserve's future actions will significantly impact the real estate market. Investors and market watchers are closely monitoring the situation, anticipating potential changes in the coming quarters.

For a deeper understanding of this topic, read the full article on BiggerPockets.

If you have any questions or need insights into how these developments might affect your real estate investments, don't hesitate to text me. I'm here to provide expert advice and guidance in these uncertain times.

Original Article on BiggerPockets

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