WASHINGTON (AP) — Hopes for an interest rate cut by the Federal Reserve this year are gradually fading, with a series of recent remarks from Fed officials emphasizing their intention to keep borrowing costs at a high level for as long as necessary to curb persistently high inflation.
One of the main reasons for the delay in cutting rates is that the inflationary pressures plaguing the economy are largely fueled by the lingering forces of the pandemic – for items ranging from apartment rents to car insurance at hospital prices. Although Fed officials say they expect inflation in these regions to eventually cool, they have indicated they are willing to wait as long as it takes.
Yet policymakers’ desire to keep their benchmark rate at its highest level in two decades – thereby keeping the costs of mortgages, auto loans and other forms of consumer borrowing painfully high – is causing its own risks.
The Fed’s mandate is to strike a balance between keeping rates high enough to control inflation, but not so high as to harm the job market. Even though most measures show that growth and hiring remain in good health, some indicators of the economy have started to show signs of weakness. The longer the Fed keeps its benchmark rate high, the greater the risk of causing a slowdown.
At the same time, with polls showing As more expensive rent, groceries and gasoline anger voters as the presidential campaign heats up, Donald Trump has sought to shift blame for rising prices to President Joe Biden.
The Fed, led by Chairman Jerome Powell, raised its benchmark rate by 5 percentage points from March 2022 to June 2023 – the fastest increase in four decades – to try to bring inflation back to its 2% target. . By the Fed’s preferred measure, inflation fell 7.1% in June 2022 at 2.7% in March.
That same indicator, however, showed that prices accelerated in the first three months of 2024, disrupting last year’s steady slowdown. On Friday, economists expect the government to announce that this measure increased by 2.7% in April compared to the previous year.
A separate inflation indicator released by the government this month suggests that prices cooled slightly in April. But as inflation remains stubbornly above the Fed’s target level, Wall Street traders now expect just one rate cut this year, in November. And even that is not a certainty, with investors estimating the likelihood of a decline in November at 63%, up from 77% a week ago.
Last week, economists at Goldman Sachs became the latest analysts to abandon a July rate cut, pushing back their forecast for the first of two cuts they expected this year to September. Oxford Economics made a similar call last month. Bank of America expects only one Fed rate cut this year, in December. Just a few months ago, many economists were predicting a first rate cut for March of this year.
“We will need to accumulate more data over the coming months to get a clearer picture of the inflation outlook,” Loretta Mester, president of the Federal Reserve Bank of Cleveland, said this month. “I now think it will take longer than I thought to reach our 2% target. » (Mester is one of 12 officials who will vote on the Fed’s rate policy this year.)
As the data mounts, there are signs that the economy is slowing down a bit. More and more Americans, especially young adults, are fall behind on their credit card bills, for example, with the share of card debt 90 days or more past due reaching 10.7% in the first quarter, according to the New York branch of the Fed. This is the highest proportion in 14 years.
Hiring is also slowing, with companies posting fewer open jobseven if job offers remain numerous.
And more businesses, including target, McDonalds and Burger King, are promoting price cuts or cheaper offers to try to attract consumers struggling financially. Their actions could help reduce inflation in the coming months. But they also highlight the challenges low-income Americans face.
“There are plenty of signs that consumers are running out of steam and hiring demand is slowing,” said Julia Coronado, a former Fed economist and president of MacroPolicy Perspectives. “We could see a more significant slowdown. »
But Coronado and other economists also see the latest trends as a sign that the economy may simply be normalizing after a period of rapid growth. Businesses are still hiring, but at a more modest pace than at the start of the year. And the data suggests that Americans traveled in save numbers over Memorial Day weekend, a sign that they are confident in their finances.
One reason inflation remains above the Fed’s target is that distortions resulting from the pandemic are keeping prices high in several areas, even as much of the rest of the economy has surpassed the pandemic.
Housing costs, led by apartment rents, jumped two years ago after many Americans sought additional living space during the pandemic. Rental costs are now slowing: they increased by 5.4% in April on an annual basis, compared to 8.8% a year earlier. But they continue to increase faster than before the pandemic.
Last month, rents and homeownership, along with hotel prices, accounted for two-thirds of the annual rise in “core” inflation, which excludes the volatile costs of food and lodging. ‘energy. Powell and other Fed officials acknowledged that they expected rents to fall more quickly than they did.
The cost of a new lease, however, has fallen since mid-2022. An indicator of rents for newly let apartments calculated by the government shows that they increased by only 0.4% in the first three months of 2024 compared to a year earlier. Still, it will take time for new, cheaper rents to feed into the government’s inflation measure.
“Market rents adjust more quickly to economic conditions than what landlords charge their existing tenants,” Philip Jefferson, a Fed vice chair and Powell’s top lieutenant, said last week. “This lag suggests that the sharp increase in market rents during the pandemic is still reflected in existing rents and could keep housing services inflation elevated for some time to come.” »
THE cost of car insurance soared nearly 23% from the previous year, a huge jump that reflects soaring new and used car prices during the pandemic. Insurance companies now have to pay more to replace totaled cars and, as a result, charge their customers more.
“These are things that happened in 2021,” said Claudia Sahm, chief economist at New Century Advisors and a former Fed economist. “You can’t go back and change that.”