“Historically speaking, the Federal Reserve’s inflation fighting playbook always starts with housing. It goes like this. The central bank begins by applying upward pressure on mortgage rates. Not long afterwards, home sales sink and existing home inventory spikes. Then homebuilders begin to cut back. That causes demand for both commodities (like lumber and steel) and durable goods (like windows and refrigerators) to fall. Those economic contractions then quickly spread throughout the rest of the economy and, in theory, help to rein in runaway inflation.
“The most frequent way we enter into recession is the Fed raises rates to fight inflation. The leading indicator for this type of recession is housing,” Bill McBride, author of the economics blog Calculated Risk, tells Fortune. “It [housing] is not the target, but it [housing] is essentially the target.”.
