Raising interest rates to combat inflation makes no sense when Iran war and tariffs are causing inflation.

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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.

The supply of U.S. homes undershot demand by 3.8 million homes in 2024, according to a Realtor.com report. We need to increase the number of houses built by more than 250,000 per year and a Federal Reserve targeted program can accomplish this goal.

Most of these public homebuilders have corporate bonds paying about seven percent interest. The Fed can work with these homebuilders to build low-income and moderate-income housing by buying newly-issued, low-interest corporate bonds paying three or four percent. In order to participate in this program, homebuilders would have to agree to build a certain number of housing units, with a defined number of low-income houses and condominiums.

With the Fed's support, these homebuilders can increase our housing stock and help bring down the cost of owning a home. The Federal Reserve can make a huge difference. Even with high general interest rates, if the Fed provides low-interest money to homebuilders, it will increase the supply of housing and lower housing costs. The Fed needs to think outside the box. And this proposal is not very far outside the box since the Fed is already purchasing corporate bonds.

Authors Website: http://www.calrecycles.com

Authors Bio:

CEO of California Association for Recycling All Trash, www.Calrecycles.com and CEO of Genuine-American Merchandise & Equipment, www.genuine-american.com, manufacturers of tennis equipment in the USA (Tennis Wellbow, Good Vibe vibration dampener and Mother Deuce: a children's book about tennis.www.genuine-american.com) Former Chairman, Made in the USA Foundation, economist and lawyer, author of 18 books and hundreds of articles.