The head of the Federal Reserve, Jerome Powell, all but signaled a series of rate hikes in the months ahead to bring down inflation. He also remarked that inflation will not go away soon.
Powell’s comments also forecast the reality of a recession. Whether the period over which it spreads is long or short, unemployment will be the key to driving rates and the cost of living down. Former Treasury Secretary Larry Summers says the jobless rate will need to go well above 5% to reverse the increase in prices. This would be well below the 10% reached at the peak of the Great Recession. This does not mean it won’t unsettle the employment prospects of many people.
Inflation comes in more than one flavor. The last one was set off by a financial crisis, which in turn was set off by a collapse in the housing market, and sovereign debt trouble in some of the largest nations in Europe. The financial system has been repaired and buttressed enough so that movie is not likely to rerun.
The housing market will suffer, but much less than in 2007/2008 when some markets had home prices drops of nearly 50% and millions of homes were foreclosed upon. Forecasts for the current drop usually run around 10%. That will be enough to rob some people of home equity, but not enough to cause an avalanche of defaults.
Unemployment and housing price fluctuations have always been local. There are already some places where unemployment rates are persistently high. Some of these are in central California and may be made worse by the drought that has consumed the region. Several Midwest and Mountain region cities have jobless rates well below 3%. The case is also true in Utah.
Home prices in some cities are considered overvalued by 50%. Among these are almost always places people relocated to during the COVID-19 pandemic. This, in turn, was often caused by a work-from-home economy. The list is topped by Boise where some home prices rose by 70% over the last three years.
The 2023 recession is almost here. The question is whether it will last until 2024.
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