Federal Reserve Chair Jerome H. Powell (left) and Fed Vice Chair Philip N. Jefferson participate in the committee’s Jan. 30-31 meeting at the William McChesney Martin Jr. Building in Washington, D.C. Federal Reserve photo

Fed Chair Jerome Powell may think his campaign to defeat inflation is going just swimmingly, false modesty aside.

But recent hoopla in the financial press about soft landings aside, the Federal Reserve’s drive to bring down prices has made immeasurably worse what was already the most expensive item in most Americans’ budgets: the cost of housing.

And the latest home price numbers – as well as rising rents – only serve to highlight this huge disconnect.

The median single-family sale price in Massachusetts hit $548,250 in February, an all-time high for the typically sleepy winter month thanks to a 10 percent year-on-year jump, Banker & Tradesman’s publisher The Warren Group reported last week.

Nationally, the median home price jumped 5.7 percent last month to $384,500 – also the highest price on record for February, the National Association of Realtors reported.

Rents also rose across the country by 3.5 percent last month and are now nearly 30 percent higher than they were before the pandemic, according to NerdWallet.

So, what’s the Fed got to do with these dismal trends? More than most people realize.

Mission Accomplished?

The Fed has dramatically hiked interest rates since mid-2022, forcing down the inflation rate from over 9 percent to just a little over 3 percent now.

The increases have helped temper wage increases and a job market that was overheating while, so far at least, avoiding pushing the overall economy into recession.

But the Fed’s decision to push rates to levels not seen in more than a decade has hit the real estate market – and hit it hard.

Rising rates have wreaked havoc with plans by developers to build more housing, whether it’s new single–family homes or new multifamily buildings.

There are signs nationally that building activity is picking up again. But the new world of higher rates has derailed plans for new condominium and apartment projects in Boston and other blue state cities where the cost of housing has become untenable, but land costs and regulatory demands have also gone through the roof as well.

While Powell, the Fed chief, keeps hinting at potential rate cuts later this year, it may take more than just a few incremental drops to get projects current on the drawing boards moving again.

Overall construction activity across Greater Boston and New England has been slumping and may not pick up again until 2025, according to the latest quarterly report by Quincy-based construction firm Lee Kennedy Co.

No Help for Housing Shortage

The Fed’s rate policies, by forcing developers to shelve plans for new housing, are in turn exacerbating the very inflationary trends the central bank is trying to combat.

For the housing crisis, both in Greater Boston and across the country, is at its core a supply crisis. A drop-off in nationwide residential construction over the last decade – or three decades, in Massachusetts – created a shortage that, in turn, is driving up both prices and rents.

The Boston area alone is short roughly 200,000 new apartments, condos and homes after decades of underbuilding.

Nationally, that number stands at more than 3 million, according to Axios, citing a report by development firm Hines.

And as the Fed’s rate hikes take their toll on plans for building new housing, that is helping keep rents and prices rising.

And rising rents, in turn, is part of the fix of prices that the Fed looks at when it decides whether or not to cut rates. Effectively, by keeping rates high, the Fed is helping keep rents – and inflation – at higher-than-normal levels – while helping stay its hand when it comes to potential rate cuts.

Missing the Full Picture

If that’s not bad enough, the Fed is not looking at the full picture when it comes to housing inflation.

That’s because home prices were taken out of the official government inflationary measures back in the early 1980s. Today, the Fed uses a measurement that looks at the price of the shelter a home or apartment provides, not the home’s value outright. It also has well-known problems accurately measuring what renters experience.

But that means the Fed can claim major progress in bringing the official inflation rate down to the 3 percent level, even as home prices continue to go up by double digits in metro areas like Boston.

Who knows how long it will take for the Fed to wrestle the official inflation rate down to 2 percent, with the number bumping around along at 3 percent for months now, and even edging up a bit, no thanks to rising rents. The “dot plot” of top Fed officials’ predictions released last week says those policymakers don’t expect it to come down any time soon.

But the consequences of the Fed’s unofficial policy of all but ignoring the impact of its rate-setting policies on new home and apartment construction will be with us for a long time to come in the form of unsustainably high prices and rents.

Scott Van Voorhis is Banker & Tradesman’s columnist and publisher of the Contrarian Boston newsletter; opinions expressed are his own. He may be reached at sbvanvoorhis@hotmail.com.