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Top economist Brian Wesbury is challenging the popular narrative that the United States has won the war on inflation. In a recent appearance on the show Varney & Co, the First Trust Advisors Chief Economist broke down why price pressures remain a threat to American families. He also weighed in on a controversial financial proposal that would allow prospective homeowners to raid their 401(k) retirement accounts to fund down payments.
The discussion arrives at a critical tipping point for the U.S. economy. While headline inflation numbers have dropped significantly from their 2022 highs, millions of households continue to struggle with the cumulative cost of living. Simultaneously, the housing market remains frozen for many first-time buyers who face the dual hurdles of high mortgage rates and record-breaking home prices.
The Difference Between Falling Rates And Falling Prices
There is a major disconnect between government data and consumer sentiment. Brian Wesbury highlighted a crucial economic reality that often gets lost in the headlines. While the rate of inflation has slowed down, actual prices have not returned to pre-pandemic levels. This distinction is vital for understanding why consumer confidence remains shaky despite positive reports from the Federal Reserve.
The Consumer Price Index (CPI) peaked at 9.1% in June 2022. Since then, aggressive interest rate hikes by the Federal Reserve have brought that yearly rate down significantly. However, Wesbury warns that “disinflation” simply means prices are rising at a slower pace. It does not mean deflation, where prices actually drop. Families are still paying roughly 20% more for goods and services today compared to four years ago.
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“We have not solved the problem just because the rate of increase has slowed. The damage to purchasing power is permanent unless wages rise significantly faster than prices for an extended period.”
This pressure is most visible in the services sector. While goods prices have stabilized, costs for car insurance, medical care, and rent continue to climb. These “sticky” inflation components suggest that the Federal Reserve may have a harder path to its 2% target than Wall Street investors currently expect.
Debate Heats Up Over 401k Usage For Homes
The broadcast also tackled a growing policy debate regarding housing affordability. With saving for a down payment becoming nearly impossible for many young Americans, proposals are circulating to allow penalty-free withdrawals from 401(k) accounts for home purchases. This idea aims to unlock the trillions of dollars sitting in retirement funds to boost homeownership rates.
Currently, the IRS allows first-time homebuyers to withdraw up to $10,000 from a traditional IRA without paying the 10% early withdrawal penalty. However, income taxes still apply. Most 401(k) plans are far more restrictive. They typically only allow for “hardship withdrawals” or loans that must be paid back with interest.
Proponents argue that owning a home is a key part of retirement security. They believe that getting into a home early allows a worker to build equity that will eventually outweigh the gains they might miss in the stock market. For many, the down payment is the only barrier standing between renting and owning.
The Risks Of Raiding The Nest Egg
Financial experts and economists like Wesbury urge caution regarding these proposals. The primary concern is the destruction of compound interest. A dollar removed from a retirement account in a worker’s 20s or 30s could cost them ten times that amount in lost retirement savings by the time they reach age 65.
There are significant risks involved with tapping into long-term savings for short-term needs:
- Compound Growth Loss: Removing $20,000 today could reduce a final retirement pot by over $150,000 over 30 years depending on market returns.
- Market Timing Risk: Withdrawing funds during a market downturn locks in losses that can never be recovered.
- Tax Burdens: Even if penalties are waived, withdrawals from traditional 401(k)s are usually taxed as ordinary income. This could push the buyer into a higher tax bracket during the year of purchase.
- Reduced Security: If the housing market crashes, the homeowner has little liquidity left and a diminished retirement fund.
Wesbury noted that while the intention to help buyers is good, using retirement funds might artificially pump up demand. This could ironically drive home prices even higher, defeating the purpose of the policy.
Housing Market Remains In A Gridlock
The context for this discussion is a historically difficult housing market. The National Association of Realtors has reported that affordability is near record lows. This is driven by a unique combination of factors that have distorted the market.
Current Market Headwinds:
| Factor | Impact on Buyers |
|---|---|
| Mortgage Rates | Rates remain elevated above 6%, doubling monthly payments compared to 2021. |
| Inventory | Existing homeowners are “locked in” to low rates and refuse to sell, limiting supply. |
| Home Prices | despite lower demand, prices stay high because there are so few houses for sale. |
| Construction | Builders face high costs for labor and materials, limiting the arrival of affordable entry-level homes. |
This gridlock has forced policymakers to look for creative solutions. However, experts warn that demand-side subsidies, like accessing 401(k)s or government grants, often just increase prices further if supply does not increase to match them.
A Fragile Path Forward
The insights from First Trust Advisors suggest a bumpy road ahead. The Federal Reserve has signaled that it needs to see more evidence of cooling inflation before it cuts rates aggressively. If the Fed cuts too soon, inflation could flare up again, mirroring the economic mistakes of the 1970s.
For consumers, the advice remains grounded in caution. While the option to use retirement funds for a home might become available or easier in the future, it is a financial lever that should be pulled with extreme care. Prioritizing an emergency fund and keeping retirement savings intact remains the gold standard for long-term financial health.
As the economy navigates this post-pandemic landscape, the balance between curbing inflation and maintaining growth remains delicate. Both the housing market and the grocery aisle prove that for average Americans, the economic “victory” feels like it hasn’t happened yet.
