Treasury Secretary Janet Yellen defended the Federal Reserve’s approach to reconciling housing and monetary policy, pushing back in an interview with us on calls from some progressive lawmakers for U.S. central bankers to more explicitly weigh the impact of interest rates on shelter costs.
One of inflation’s top drivers has been the costs of shelter since 2022. The reasons are complicated, but economists generally attribute this to a longstanding lack of housing supply and restrictive zoning laws across the United States. These laws prevent denser housing.
On top of all that, rising interest rates have driven up the price of mortgages. That’s been a problem for lawmakers like Sen. Elizabeth Warren (D-Mass.) and Senate Banking Committee Chair Sherrod Brown (D-Ohio), who have pushed officials like Fed Chair Jay Powell to consider whether the Fed is keeping housing costs elevated with rates and — by extension — contributing to inflation.
Yellen, a former Fed chair, doesn’t quite buy it.
“The Fed has an overall price stability mandate, and they have made clear they interpret that as 2% inflation, as measured by PCE price index. The PCE price index includes housing,” Yellen said in a recent interview. “They don’t have a separate housing price objective. They have one price stability objective, and housing is part of it.”
Back in January, Warren led a letter to Powell urging the U.S. central bank to cut rates for the sake of housing affordability. She wrote:
Later that month, Powell addressed these concerns at a news conference. “Our statutory goals are maximum employment and price stability, and that’s what we’re targeting. We’re not targeting housing price inflation, the cost of housing, or any of those things,” he said.
Yellen defended the Fed’s posture here in part by pointing to the pandemic, which introduced any number of weird economic phenomena that are still impacting the country.
“There’s a lag in these rental prices coming down. There’s very good reason to believe they will come down, but look — the pandemic plus low interest rates led to a boom in housing [and] drove up house prices,” Yellen said. “We’re living with that. It’s really something that was pandemic related.”
Inflation nation: Yellen won’t dispute the difficulties that Americans have experienced under rising prices in general. It doesn’t help that core consumer costs “including grocery prices and rent are up more,” the Treasury secretary said.
Of course, like many economists in and around the Biden administration, Yellen is quick to say that wage growth has kept up rising prices.
“Wages have also gone up on average — weekly earnings — by a little bit more than prices have gone up. So on average, people aren’t worse off,” Yellen said. “But things that are very salient to people’s budgets, like rent and food, have gone up more. I think that’s what people are focused on.”
