Inflation, interest rates and the housing paradox

ONE of the occupational hazards of my profession is having people ask me what is going to happen to the market. I am never sure whether to give the answer attributed to various famous financial titans - it will fluctuate - or to reply, more accurately, "God knows". But some predictions seem safe. Clearly, the Federal Reserve will raise interest rates repeatedly over the months ahead, continuing that process until there are clear signs that inflation is coming down to tolerable levels.

But isn't the Fed far behind the curve? Inflation is at a 40-year high, yet the Fed has only begun to hike. Shouldn't it greatly raise rates now, now, now?

Well, no. We need to talk about how monetary policy actually works. And when we do, we'll see that there is a troubling paradox about current policy. The Fed must hike: Inflation must be curbed, and as a practical matter, interest rates are the only game in town. Yet higher rates will operate largely by hitting the housing market - and over the longer term, one big problem with America is that we aren't building enough housing.