At a mad moment, a dull Fed is good

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Good morning. New estimates from the Congressional Budget Office showed the Republican’s “big, beautiful bill” would add more to the US deficit than expected. The bill is now believed to add $2.8tn to the US deficit over the next decade; the previous estimate was $2.4tn. The bill is already wobbling a bit in the Senate. This won’t help.

Unhedged will be off tomorrow, and back in your inboxes on Monday. On Monday, please also tune into a Reddit “Ask Me Anything” with Rob at 1pm EST/6pm BST. Email us in the meantime: unhedged@ft.com.

The Fed

The Federal Reserve had an ideal day yesterday. It did almost nothing at all and elicited almost no response.

There was, it must be admitted, one noteworthy change in the Fed’s statement. In May, it read:

Uncertainty about the economic outlook has increased further. The [Federal Open Market Committee] is attentive to the risks to both sides of its dual mandate and judges that the risks of higher unemployment and higher inflation have risen.

Yesterday, that became:

Uncertainty about the economic outlook has diminished but remains elevated. The committee is attentive to the risks to both sides of its dual mandate.

That is just a nod to the fact that the chances of very high US tariffs have subsided. There was also a small shift in the committee’s aggregate economic projections. Expectations for growth were nudged down, and expectations for inflation and employment were nudged up — relative to the last projections from way back in March, before Trump’s “liberation day” tariff announcements. The bond and stock markets, quite rightly, barely moved in response. Investors knew the change in the Fed’s stance was coming, given how the world has changed. The new news, such as it was, was old news.

Other than that, nothing. No rate cut and no variation in the message. Chair Jay Powell hammered away his favourite theme. Though there has not been much in the way of tariff-based inflation yet, it is coming; we just don’t know how much. But because the economy is still quite strong, despite cooling a bit, the Fed can wait and see. And with inflation still above the two per cent target, waiting makes sense.

At the moment, the US budget is up in the air, the global status of the dollar is in play, two wars are being fought, and the president and his proxies are lobbing consistent abuse at the central bank. In the midst of all that, Powell managed to bore everyone. In 2025, that is what success looks like.

(Armstrong and Reiter)

Homebuilders

This week we got three pieces of bad news from homebuilders. The National Association of Home Builders Index, a survey-based gauge of the market for new, single-family homes, unexpectedly dropped two points. It is now just above the level it was in April 2020, in the midst of the Covid-19 lockdowns:

Housing starts and permits also dropped more than expected:

Finally, Lennar, the nation’s second-biggest homebuilder by sales, had a poor earnings report on Tuesday, knocking 7 per cent off the stock. The company sold fewer homes than hoped and its margins narrowed. Stuart Miller, chief executive, spoke about some of the contradictions in the market. Supply is still constrained, as it has been since the great financial crisis; so prices remain very high; yet builders are pulling back because demand is weakening at current price levels; and mortgage rates do not appear set to decline. So:

The environment is about recognising that short supply is keeping prices higher and that only lower prices enabled by lower-cost structures will define affordability. This trend has started with reducing margins and using incentives to enable affordability. But looking ahead, it is much more about transitioning to lower-cost structures.

This is a market with structural problems. In a functioning market, sustained high prices would bring in more supply, which would bring prices down enough to bring more buyers in. But while building activity picked up briefly after the pandemic, affordability is still poor, so the inventory of unsold homes is rising. And high inventories scare the homebuilders — who all had near-death experiences in 2008 — into inactivity:

A big part of the problem is regulatory. Another part may be that builders are unwilling to accept that their post-pandemic margins were an aberration. As Miller suggests, more builders need business models that can produce affordable homes. These adjustments take time.

Some good news: home prices are starting to come down a bit in response to sustained high rates and poor affordability. Rick Palacios of John Burns Consulting notes prices for existing and new homes are dropping in most parts of the US, including expensive regions such as Southern California. “This was not on peoples’ list of what is going to happen this year”, particularly in the expensive markets, said Palacios. He provided us with this chart:

The housing market’s troubles will have short-term effects on the economy that point in different directions. Lower construction activity is bad for growth, wages and employment. On the other hand, high home prices stemming from a semi-frozen market create positive wealth effects which support consumption. But the important thing for the long-term health of the economy is having a housing market that clears — where buyers and sellers meet at prices that help both sides. That is not happening right now. More adjustments to come.

(Reiter and Armstrong)

One Good Read

Damodaran on alternative investments.