MNI: Fed Community Advisers Say Housing Eating at Labor Gains

The Federal Reserve's monthly purchases of mortgage bonds are driving up housing costs and creating obstacles for a more inclusive recovery, members of the Federal Reserve Board's Community Advisory Council told MNI.

The 15-member advisory board that meets frequently with Fed officials supported the central bank's actions to bolster the economy last year, including its decision to buy USD40 billion in agency mortgage-backed securities each month. But member advisers said in recent interviews the housing market has turned and the original rationale for entering the market appears to have dwindled as prices surge, with some adding they expect the Fed to make changes in that policy in time.

"That seemed like a smart idea at the time, and it did help keep the markets moving, but as you come through it you begin to see some negative repercussions too," said Susan Bradbury, a professor at Iowa State University and member of the Fed's council. "Now we're trying to figure out how do we address them."

"As we get further into this and we see what the outcomes are, this aspect of inequality and the way that certain low- and moderate-income households are being pushed out of the market is a concern," she added. "It's one of those things -- the road to hell is paved with good intentions."

Other community advisers added that inflation will exacerbate existing housing supply shortages, the result of decades-long underinvestment in low income housing. Rising parts and lumber prices alone have raised single family homes prices by about USD30,000, they noted.

"The Fed has blunt tools and they will do what they can do," said Jesse Van Tol of the National Community Reinvestment Coalition and another member of the Fed's community council. He remains confident that the Fed will wait for evidence of a broad-based recovery before shift out of its overall accommodative stance, despite a recent hawkish tilt at the June FOMC meeting.

Fed officials have been publicly debating whether MBS purchases should be wound down faster than that of Treasuries, while ex-officials and current Fed leaders including Tom Barkin of the Richmond Fed have said doing so could unnecessarily complicate the process.

PERSISTENT LABOR TIGHTNESS

The community advisers have been encouraged by labor market progress this year, including the increased number of opportunities and wage hikes for low- and middle-income Americans as the economy recovers. Demand for workers in these demographic groups have outstripped supply as much as in the rest of the labor force, they said.

"Like the rest of the nation, we are experiencing workforce shortages," said Laura Murillo, president of the Houston Hispanic Chamber of Commerce and member of the Fed's council.

Child care challenges continue to put a strain on families and mothers, while the rising cost of housing presents a new source of friction in the job matching process.

"One reason the labor market may be tight is that people are not moving around as much," said Van Tol. Job applicants are pessimistic that they can afford housing in new areas at a time when the spread of the more dangerous Delta variant could cause employers to pull back on hiring, he said.

That feeds into the broader trend of employees and households reconsidering their relationships with employers, advisers say.

"A lot of people have left the labor force entirely and it doesn't look like they are going back," said Bradbury, the professor from Iowa. "In spite of the fact that we have relatively low unemployment, which is even lower in Iowa [at 3.9%], I do think that the labor market is a lot tighter than the numbers suggest," she said. "I don't think the statistics are really telling us the whole story."