Statement for the Record: The Federal Reserve’s Semi-Annual Monetary Policy Report

March 6, 2024 Rakeen Mabud, Ph.D.

The Federal Reserve’s Semi-Annual Monetary Policy Report

House Financial Services Committee
March 2024

Groundwork Collaborative appreciates the opportunity to submit this statement for the record in connection with the March 6, 2024 hearing entitled “The Federal Reserve’s Semi-Annual Monetary Policy Report” before the House Financial Services Committee.

Textbook theories of inflation assume that rapid price growth is driven by too much money chasing too few goods. By increasing the cost of borrowing, interest rate hikes attempt to tamp down demand, and the result is an increase in unemployment. Prominent economists such as Larry Summers and Chair Powell himself have long suggested that without mass unemployment, inflation would not come down.

Today’s economy is a clear repudiation of the theory that mass unemployment is necessary to bring inflation down. Unemployment has been below 4% for more than 24 months and inflation has been falling for more than 19 months off of its peak. All of the evidence suggests that the Federal Reserve must cut rates before they do further harm. This statement lays out some of the major risks associated with the Fed maintaining a high interest rate environment.

The Fed’s high interest rates continue to stifle new housing construction and to put upward pressure on prices by forcing potential buyers back into the rental market.

In January 2024, shelter costs contributed over two thirds of total inflation – inflation will not come down until shelter costs get under control. The Fed’s high interest rate environment is perpetuating high shelter costs and worsening a longstanding housing supply shortage. High rates affect the housing market through two main channels.

First, high mortgage rates put home ownership out of reach for prospective buyers, pushing them back into the rental market. Increased demand in the rental market results in landlords raising rents. Mortgage rates have risen nearly 60% since the Fed began raising interest rates in March 2022, putting significant pressure on rents.

Second, rate hikes make financing new housing construction more expensive, which means that builders don’t build as many new homes. Housing supply shortages were driving the U.S.’s longstanding housing crisis even before the rate hikes began. Between 2012 and 2022, the gap between single-family home constructions and household formations grew to 6.5 million homes. The best way to address the longstanding housing shortage in the U.S. is to increase the supply of housing. The Fed’s high interest rates – which are working exactly as they are designed – are making this crisis worse by increasing the cost of borrowing and styming new construction.

The once-in-a-generation investments that Congress and the Biden Administration made in our clean energy future are being imperiled by the Fed’s high interest rates.

The public investments in the Inflation Reduction Act are intended to leverage significant debt-financed private clean energy investments. However, interest rates are more than double what they were when the IRA passed, making private investment much more expensive. In offshore wind, for example, an estimated 60% of cost increases are squarely to blame on high interest rates.

The Fed’s persistently high interest rates and associated dampening effects on private investment in clean energy mean that American families will continue to be subject to the whims of volatile commodities markets. Over the recent inflationary period, oil price shocks directly drove up the price of energy for households while adding extra cost pressures for businesses that inflated prices across the board.

Persistently high interest rates threaten the remarkable recovery and healthy labor market that we are currently experiencing.

We are in the midst of a remarkable recovery. Unemployment has been below 4% for more than 24 months, and inflation has been falling for more than 19 months off of its peak. GDP growth has been strong for 6 quarters. The Small Business Administration has received a record 16 million new business applications. This is an economy that is roaring out of recession, and all of that is threatened as long as Chair Powell continues to keep interest rates high.

Interest rate hikes are a blunt policy instrument that operate with a lag. The Fed cannot finetune the economy – they simply will not know if they have raised rates too much until it is too late. The stakes are too high for the Fed’s “wait and see” approach. The Fed should cut rates immediately to curtail additional harm.