Federal Reserve Rate Increase May Cause a Recession
By Joel D. Joseph, Economist
A CNN commentator hit the nail on the head when she said that the Federal Reserve's rate increase "will not open the Strait of Hormuz." Before proposing a cure for anything, you should know the cause of the problem. Inflation now is caused by two things: the war with Iran and tariffs. Raising interest rates will not affect either one.
But what will happen with higher interest rates is that the housing crisis will worsen. Mortgage interest rates are now seven percent. When the Fed raised interest rates, the stocks of the eight top housing builders sunk immediately. In addition, credit card loan rates and all financing costs will rise. This will lead to an economic downturn and a possible recession.
The Housing Crisis
The United States has a housing crisis. Young Americans can no longer afford to buy homes or condominiums. The median age of first-time buyers rose to 40 in 2025 from 38 the year before, and is up sharply from 33 just five years ago, according to the National Association of Realtors. The share of all home purchases that were made by first-time buyers fell to 21% this year, the lowest on records since 1981.
Federal Reserve Chairman Jerome Powell said, "The real issue with housing is that we have had, and are on track to continue to have, not enough housing." Powell added, "All of the aspects of housing are far more difficult, and where are we going to get the supply? And this is not something the Fed can really fix." Powell is dead wrong. The Fed has the power to fix the housing market by increasing our housing supply.
In March, 2020, the Federal Reserve announced that it would buy investment grade corporate bonds, and the next month set the amount at up to $250 billion and extended the purchase to junk bonds. With this program, the Federal Reserve established the Secondary Market Corporate Credit Facility (SMCCF) to support credit to employers by providing liquidity to the market for outstanding corporate bonds.
The SMCCF's purchases of corporate bonds created a portfolio that tracked a broad, diversified market index of U.S. corporate bonds, but generally did not invest in homebuilders.
The Fed's Corporate Bond Buying
The Federal Reserve has picked corporate bonds that don't make a lot of sense.
The top three purchases of corporate bonds are all foreign companies: Toyota, Volkswagen and Mercedes. The Fed also bought American bonds from Apple, AT&T, Verizon and Microsoft. None of these companies really needed the Fed's help. Apple and Microsoft are two of the biggest corporations on the planet with valuations in the trillions of dollars. In contrast, the homebuilders are smaller companies, not trillion-dollar behemoths like Microsoft and Apple.
The Fed also bought bonds issued by General Motors, Ford, BMW and CVS. I don't see any evidence that the Federal Reserve's bond purchasing has helped the housing market.
The Fed Can Target Housing Developers
There are eight public companies that manufacture homes in the United States. They are D.R. Horton, Lennar Corporation, the Pulte Group, NVR, Taylor Morrison, KB Home, Meritage Homes Corporation and the Clayton Properties Group. Lennar alone built an impressive 80,000 homes in 2024, bringing in more than $40 billion in revenue. Pulte built 30,000 homes and KB Home built 14,000 homes in 2024. In total, these companies built approximately 200,000 homes in the United States in 2024. Smaller builders built another 100,000 homes in 2025.
(Note: You can view every article as one long page if you sign up as an Advocate Member, or higher).
Post Article Comment and Rate This Article
