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Here’s Why the Fed Is Targeting the Housing Market to Control Inflation

Market Data + Trends

Here’s Why the Fed Is Targeting the Housing Market to Control Inflation

The Federal Reserve has singled out the housing market as the No.1 driver of inflation, but its aggressive rate hikes could send the economy headfirst into another recession

July 28, 2022
Dollar bill with Federal Reserve stamp on top of newspaper with inflation headline
Image: Stock.adobe.com

In its race to fight inflation, the Federal Reserve has made the real estate market its No. 1 target by raising its short-term interest rates to make the cost of buying a home even more expensive. While that may seem like a contradictory way to create more affordability, the Fed's approach already seems to be working, says Realtor.com. 

As borrowing costs jump to new highs, demand falls and prices stabilize, a scenario currently playing out in the housing market as buyers contending with elevated mortgage rates pull back from home purchases. After raising rates by another 0.75 basis points on Wednesday, the Fed’s aggressive inflation control methods have market economists worried that another big rate hike could increase the likelihood of a recession in the near future.

The big question is whether the Fed will continue to raise rates—increasing the likelihood of another recession.

“My guess is they’ll have to raise rates one or two more times,” says economics professor Lawrence J. White, of New York University.

Critics have accused the Fed of allowing inflation to get out of hand before taking steps to get it under control.

“They were too lenient for too long,” says White. “They took too long to realize that inflation was a problem. They don’t want to be caught on the other side, prematurely easing up and causing inflation to rekindle.”

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