Fed's Barr Warns Inflation Not Under Control, Additional Rate Hikes Needed

[Mexico City = Shim Young-jae, Correspondent] Michael Barr, a member of the U.S. Federal Reserve (Fed), stated that there is a high possibility that additional monetary policy adjustments will be necessary to bring inflation down to target levels. While economic growth and the labor market remain robust, the inflation rate exceeds the Fed's target of 2%, and the risks related to prices have increased, while risks in the labor market have decreased.

On the 23rd (local time), Barr diagnosed the structural causes of the U.S. housing crisis at the "Housing Affordability 2026: Community Development Summit" hosted by the Chicago Federal Reserve Bank. He presented the scale of the housing supply shortage in the U.S. as between 2 million and 5.5 million units, citing land and construction regulations, stagnation in construction productivity, damage to the construction base after the financial crisis, and rising construction costs post-COVID-19 as major causes.

"Unclear Trend Towards 2% Inflation"...Hints at Additional Policy Adjustments

Barr explained that the U.S. economy has faced turmoil over the past 18 months due to tariffs, conflicts in the Middle East, and Russia's war in Ukraine. Recently, there has been a surge in investment demand for building artificial intelligence (AI) infrastructure. He assessed that these shocks have impacted inflationary pressures.

Barr diagnosed that economic growth is strong and the labor market is solid. However, he pointed out that inflation exceeds the Fed's 2% target and is not clearly trending down towards that target in a timely manner.

He explained that while the risks of achieving the inflation target have increased, the risks in the labor market have decreased. Therefore, he stated that it was necessary to recalibrate monetary policy to balance the risks surrounding the Fed's dual mandates of maximum employment and price stability.

Barr evaluated last week's Federal Open Market Committee (FOMC) decision to raise policy rates as an important measure, stating that he also supported the rate hike.

He explained that considering changes in economic conditions, monetary policy had deviated from an appropriate position. He believes that last week's rate hike was a correct adjustment in the right direction.

He also hinted at the possibility of further adjustments. Barr stated that based on the baseline outlook, there is a high likelihood that additional policy adjustments will be necessary to lower inflation to the target in a timely manner.

He emphasized that price stability is crucial for sustainable growth that supports maximum employment.

Housing Affordability at Lowest in 21 Years...Home Prices Up 70% While Income Up 17%

Barr diagnosed that the burden of housing costs in the U.S. has deteriorated over a long period. He explained that many households are struggling to afford housing costs as rents and home prices have risen compared to income and savings.

According to the Atlanta Federal Reserve Bank's Housing Affordability Monitor, the housing affordability index is expected to drop to 68 by July 2026, the lowest level in 21 years.

An index below 100 means that median-income households find it difficult to afford median-priced homes at current mortgage rates.

According to Barr, U.S. housing was generally affordable from the collapse of home prices in 2006 until before the COVID-19 pandemic. Since then, the index has continuously fallen below 100.

Real home prices are also at record highs in various regions of the U.S. Coupled with higher mortgage rates than before COVID-19, many households have found it difficult to purchase homes, Barr explained.

He emphasized that while the Fed's short-term policy rates influence long-term borrowing rates, including mortgages, mortgage rates are also affected by various other factors. Generally, when inflation decreases, mortgage rates also decrease, and the Fed is working to achieve its price stability target.

The gap between income and home prices has also widened.

According to data presented by Barr, the median household income in the U.S., adjusted for inflation from 2000 to 2024, has increased by about 17%. During the same period, real home prices have risen by about 70%.

This indicates that the pace of home price increases has significantly outstripped the growth of household income.

According to the Fed's report on U.S. household economic life, among those planning to buy their first home in 2024, 68% responded that they cannot afford the down payment.

Renters are experiencing similar cash burdens. When renting a new home, a significant amount of money is needed for the first month's rent, security deposit, and application fees.

The burden of rent has also increased.

According to Barr, in 1980, 55% of rental housing was priced below $3,500 in current value. Currently, only 20% of homes charge rent below this price.

About half of U.S. renters currently spend more than 30% of their income on rent. About a quarter of renters use more than half of their income for rent.

Lock-In Effect Prevents Existing Homes from Coming to Market...Half of Mortgages Below 4%

Barr noted that households that took out mortgages at low rates before 2022 have less incentive to sell their current homes and move. This is because they would have to bear the current high mortgage rates if they moved.

Currently, about half of U.S. mortgages have rates below 4%. About 80% are below 6%.

The so-called "lock-in effect," where existing homeowners do not want to give up low rates, reduces both housing demand and supply.

Barr explained that in a market with a shortage of housing supply, the effect of reduced listings could outweigh the decrease in demand, potentially driving up housing prices.

Homebuyers are ultimately burdened not only by high home prices and mortgage rates but also by rising homeowners' insurance premiums and property taxes.

Rent has also significantly exceeded pre-COVID-19 levels.

According to Barr, the residential rental component of the U.S. Consumer Price Index (CPI) in August of this year was 34% higher than in December 2019. Although the rate of increase in housing costs has significantly slowed compared to 2022-2023, it is still rising at an annual rate of about 2.75%.

Barr stated that to improve housing affordability, various institutions and sectors must work together to respond effectively.

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