As the latest sign that the economy is slowing down, the once red-hot housing market is starting to sputter. Based on data released this morning, only 5.41 million existing homes were sold in the US in May, which is 3.4% lower than the prior month and 8.6% lower than the same month a year ago. 5.41 million is also the fewest existing homes sold since the first half of 2020, when pandemic-induced lockdowns caused the economy to grind to a halt.
Back then, the Fed quickly came to the rescue by slashing interest rates and flooding the economy with liquidity. Unfortunately, that is unlikely to happen this time around. In fact, Federal Open Market Committee (FOMC) members may be congratulating themselves right now, because this is exactly what they have been trying to accomplish. With inflation running way above the Fed’s target of 2% for much longer than could be considered transitory (at least while keeping a straight face) and no control over supply, the Fed’s only option at this point is to curb demand. They are doing that by hiking rates and removing liquidity from the system, thereby inducing a tightening of financial conditions.
The latest batch of economic data – whether it’s housing, retail sales, industrial production, employment – clearly points to a broad-based slowdown, but the Fed will likely need to keep at it for a while longer before inflation cools down enough for the Fed to declare mission accomplished. Until then, keep your seatbelts fastened.
Sauro Locatelli CFA, FRM™, SCR™
Director of Quantitative Research
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