


Despite President Joe Biden‘s laudable refusal to attack the political independence of the Federal Reserve, his Democratic allies on the Hill have failed to follow suit.
For the umpteenth time during Biden’s presidency, Sen. Elizabeth Warren (D-MA) has spearheaded a partisan attack on independent monetary policy, calling once again for the Fed to slash interest rates despite inflation persisting at nearly twice the central bank’s maximum target of 2%.
But this time, not only does the senator say high rates risk a recession, a plausible enough possibility, but Warren also outlandishly claims that the current interest rate policy “is driving up housing and auto insurance costs, which are currently the main drivers of the overall inflation rate.”
The auto insurance canard is easier to debunk: According to May’s consumer price index report, motor vehicle insurance actually fell by 0.3% last month, even while the federal funds rate remained at 23-year highs. And why? Because car insurance simply lags behind cars overall, which soared in price during the pandemic thanks to both the supply chain shortage of COVID-19 and the demand induced by multi-trillion dollar deficits.
The notion that housing costs are being driven by the Fed is more complicated but also a more pernicious lie to debunk. It is true that increased mortgage rates are reflected in both the increasing list prices of homes on the market as well as the Bureau of Labor Statistics official measure of “owners’ equivalent rent of primary residences,” which samples how much an owner would charge if he or she were to rent out the primary home in which he or she currently resides. But even as rental prices have dramatically diverged from the cost of home ownership, “rent of primary residence” inflation is pretty similar to OER inflation.
What about home prices themselves, rather than the BLS’s attempt to estimate their inflation rates? We all know that the primary factor fueling home prices is the intersection of pent-up demand and supply shortages thanks to a decade of terrible zoning strangulation, but do mortgage rates increase the costs of homes? Obviously not.
In the simplest terms, monetary tightening is continuing to succeed in bringing home prices down. The average home price, which peaked at $525,100 in 2022, has since slightly decreased to $513,100, while the median home price sunk to $420,800 from its 2022 peak of $442,600. According to the IMF, although home prices are up nearly 20% since before COVID-19, they’ve fallen by 2.4% since last year. This is clearly an incredibly modest softening in the market, but it’s much better than the alternative desired by Warren.
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While the BLS provided the year’s first bit of evidence that inflation is finally slowing overall, CPI inflation is north of 3%, PCE inflation well above 2%, and “supercore” inflation still close to 5%. One good data point is necessary, but not sufficient, to establish the trend that the Fed can cut interest rates without triggering rebound inflation.
Of course, Warren’s calculus here isn’t economic but rather political. At the start of the year, the Fed projected it would slash rates three times while investors telegraphed more than twice as many cuts. Now, even with today’s decent data, treasury futures reflect the Fed will only cut rates once before Election Day. Warren’s appeal may be futile, but make no mistake: The message to Democrats, that they can blame the Fed if Biden fails, is clear.