The sharp interest rate hikes of the past two years will likely take longer than expected to bring down inflation, several Federal Reserve officials said in recent comments, suggesting there may be few rate cuts. rate, if any, this year.
A major concern expressed by Fed policymakers and some economists is that rising borrowing costs are not having as much impact as economics textbooks suggest. Americans For example, according to government data, banks as a whole are not spending significantly more of their revenue on interest payments than they were a few years ago, despite the Fed's sharp rate hikes. That means higher interest rates may not help limit spending for many Americans or curb inflation.
“The current situation is one where these high rates are not generating more stopping power on the economy,” said Joseph Lupton, global economist at JP Morgan. “That would suggest they either need to stay higher for longer, or perhaps even higher for longer, meaning rate hikes could enter the conversation.”
Chairman of the Fed Jerome Powell told a news conference earlier this month that an interest rate increase was “unlikely,” but he did not rule it out entirely. Powell stressed, however, that the Fed needed to take more time to gain “greater confidence” that inflation was indeed returning to its 2% target.
“I think the hikes announced by the Fed are not as big as the market was hoping,” said Gennadiy Goldberg, an economist at TD Securities.
On Friday, Dallas Federal Reserve President Lorie Logan said it was “simply too early to be thinking” about a rate cut, according to media reports. She also suggested it was unclear whether the Fed's rate was high enough to suppress inflation. of the 19 heads of the Fed's interest rate-setting committee, even though it will not vote on rates this year.
Higher long-term borrowing costs are sure to disappoint many, from Americans hoping for lower mortgage rates before buying a home, to Wall Street traders eagerly awaiting a reduction, to the president. Joe Bidenwhose re-election campaign would likely benefit from lower rates.
On Wednesday, the government will release the April inflation report, and economists predict it will show a slight decline in inflation to 3.4%, from 3.5% in March. It was, however, up from 3.1% in January, after falling sharply last year, raising concerns about whether progress in reducing inflation has stalled.
The Fed pushed its benchmark rate to 5.3%, its highest level in 23 years, in an effort to lower inflation, which peaked at 9.1% in June 2022.
Yet despite these big increases, Americans spent an average of just 9.8% of their after-tax income to pay interest and principal on their debts in the fourth quarter of last year. Two years earlier – before the Fed raised rates – they had spent 9.5%, a historically low percentage.
Why hasn't this number increased further? Millions of American homeowners refinanced their mortgages at rock-bottom rates over the past 15 years, when the Fed kept its key interest rate near zero to support the economy. As a result, their mortgages remain low and their finances are largely unaffected by the Fed's policies. Consumers those who paid off their cars or took out five-year, low-rate auto loans before rates rose also felt little impact.
The average rate for a new 30-year mortgage is nearly 7.1 percent, according to mortgage giant Freddie Mac. But Goldberg calculates that the average rate for all outstanding mortgages is just 3.8%, barely higher than 3.3% when the Fed began raising rates. The gap between the new rates and the average outstanding amount is the highest since the 1980s.
“One of the things we're hearing is that perhaps because so many Americans refinanced their mortgages when mortgage rates fell during the pandemic…people aren't yet feeling the impact of rising rates mortgages,” Neel Kashkari, president of the Minneapolis branch of the Federal Reserve. , said last week: “If this is true, and I think there is some truth in it, then it may take longer” for the Fed's rate hikes “to be fully felt by the real estate market and by the economy in general.
Many large companies also kept rates low before the Fed began raising rates, limiting the impact of rising borrowing costs.
“I think the most likely scenario is where we are right now, which is that we stay put for an extended period of time,” Kashkari said, referring to the Fed's policy rate.
There are signs that higher rates are causing more financial hardship for many Americans as delinquencies on credit cards and auto loans rise. And many young Americans are increasingly worried that with mortgage costs so high, they won't be able to afford to buy a home.
However, delinquencies are climbing from very low levels and are not yet historically high. Stimulus measures implemented during the pandemic and rising incomes have allowed many people to pay off debt in recent years.
And Americans, in total, are much less in debt as a percentage of their income than during the housing bubble 15 years ago, Lupton notes.
“With consumers and businesses sheltered from higher interest rates through debt repayment and refinancing during the pandemic, their overall interest burden is not yet historically high,” Tom said Barkin, president of the Federal Reserve Bank of Richmond, in recent comments. , this suggests that the full impact of the rate hike has not yet come.
Goldberg said rising borrowing costs will eventually bite as more Americans throw in the towel and buy a home, even with higher mortgage rates. In some cases, they may be moving for a new job or have family changes that require a move. And, over time, more businesses will also need to borrow at higher rates, as their low-interest loans mature.
“The longer we stay here, the more people can’t wait,” Goldberg said. “If the Fed could wait for consumers, that would result in a longer hike on Main Street.”