The Federal Reserve’s “single method” of fighting inflation by raising interest rates has been questioned by CNBC’s Jim Cramer, who claims that it has “backfired.” In particular, Cramer drew attention to the Fed’s attempts to control housing inflation, which have not only fallen short of their goals of slowing inflation but also of lowering home prices and rent costs.
Cramer contends that the Fed’s rate increases have increased the cost of housing. He gave the example of a fictitious real estate developer looking to profit from increased rents in a certain location. Usually, developers would approach a bank to get financing. However, because of a surplus of money from the epidemic period, banks stashed funds in bonds with extended maturities, making it difficult to provide loans to that developer. With the rate increases, the banks are unable to sell those long-dated bonds without suffering substantial losses, creating a scenario akin to that which resulted in Silicon Valley Bank’s failure.
According to Cramer, the tougher lending criteria brought on by the rate increases would cause a decrease in the supply of homes since it will be more difficult to get a loan from a bank. Rents thus don’t decline as much as the central bank would want, and house values remain high. Cramer said that as a consequence, the Fed had “defeated themselves”.
Even if Fed Chair Jerome Powell is a “prudent” leader, Cramer said that other, more hawkish officials want to keep raising interest rates regardless of whether they are necessary.
In reaction to higher-than-anticipated inflation, which reached a 39-year peak in November 2021, the Fed has hinted that it may hike interest rates sooner than originally anticipated. Some Fed representatives have also argued that the institution may need to move more firmly to fight inflation, for example, by speeding up the reduction of its bond-buying program.
Given the current COVID-19 pandemic and the potential for additional varieties, there are worries that raising rates too soon might stunt economic development and trigger a recession. The Fed has made it clear that it will closely watch the economic statistics and modify its policies as necessary.
