WASHINGTON — The sharp interest rate increases of the past two years will likely take longer than previously expected to reduce inflation, several Federal Reserve officials said in recent comments, suggesting there may be few, if anyrate cuts this year.
A major concern expressed by both Fed policymakers and some economists is that higher borrowing costs are not having as much of an impact as economics textbooks suggest. Americans as a whole, for example, are not spending much more of their income on interest payments than they did a few years ago, according to government data, despite sharp rate hikes from the Fed. That means higher rates High prices may not be doing much to limit the spending of many Americans or to slow inflation.
“What we have right now is a situation where these high rates are not generating more stopping power in the economy,” said Joseph Lupton, global economist at JP Morgan. “That would suggest they need to stay higher for longer or perhaps even higher for longer, which means rate hikes could enter the conversation.”
Fed Chairman Jerome Powell said at a press conference earlier this month that an interest rate increase was “unlikely”, but did not rule it out completely. Powell emphasized, however, that the Fed needed more time to gain “greater confidence” that inflation is indeed returning to the Fed’s 2% target.
“I think the fact that the Fed said that hikes are not as much in play as the market expected,” said Gennadiy Goldberg, an economist at TD Securities.
On Friday, Dallas Federal Reserve President Lorie Logan said it was “too early to think” about cutting rates, according to news reports. She also suggested that it is unclear whether the Fed’s rate is high enough to contain inflation. of the 19 officials on the Fed’s interest rate-setting committee, although she won’t vote on rates this year.
Higher borrowing costs for longer will certainly disappoint many, from Americans waiting for lower mortgage rates before buying a home, to Wall Street traders anxiously awaiting a cut, to President Joe Biden, whose re-election campaign is likely would benefit from lower rates.
On Wednesday, the government will release the April inflation report, and economists predict it will show that inflation fell slightly to 3.4% from 3.5% in March. He has rose from 3.1% in Januaryhowever, after falling sharply last year, raising concerns about whether progress in reducing inflation has stalled.
The Fed raised its key rate to a 23-year high of 5.3% in an effort to reduce inflation, which peaked at 9.1% in June 2022.
Yet despite these sharp increases, Americans, on average, spent just 9.8% of their after-tax income on paying interest and principal on their debts in the fourth quarter of last year. Two years earlier – before the Fed raised rates – they spent 9.5%, a historically low percentage.
Why didn’t the number increase more? Millions of American homeowners have refinanced their mortgages at very low rates over the past decade and a half as the Fed kept its key rate near zero to shore up the economy. As a result, their mortgages remain low and their finances are largely unaffected by Fed policies. Consumers who paid off their cars, or who took out low-rate five-year loans before rates rose, also felt little impact.
The average rate for a new 30-year mortgage is almost 7.1%, according to mortgage giant Freddie Mac. But Goldberg calculates that the average rate on all outstanding mortgages is just 3.8%, not much higher than the 3.3% when the Fed began raising rates. The difference between the new rates and the average balance is the highest since the 1980s.
“One of the things we’ve heard is that perhaps because so many Americans refinanced their mortgages when mortgage rates fell during the pandemic…people are still not feeling the impact of higher mortgage rates,” Neel Kashkari, Federal Reserve branch president in Minneapolis. , said last week. “If that is true, and I think there is some truth to that, then it may take longer” for the Fed’s rate hikes “to be fully felt by the housing market and the economy more broadly.”
Many large companies also locked in low rates before the Fed began to hike, further limiting the impact of higher financing costs.
“I think the most likely scenario is where we are now, which is that we stay put for a long period of time,” Kashkari said, referring to the Fed’s key rate.
There are signs that higher rates are causing more financial difficulties for many Americans as delinquencies on credit cards and auto loans rise. And many younger Americans are increasingly concerned that with mortgage costs so high, they could not being able to pay a home.
However, defaults are rising from very low levels and are not yet historically high. Pandemic-era stimulus checks and rising incomes have allowed many people to pay down debt in recent years.
And Americans, in total, have much less debt as a percentage of their income than they did during the housing bubble 15 years ago, Lupton notes.
“With consumers and businesses shielded from higher interest rates thanks to pandemic-era debt paydowns and refinancing, their aggregate interest burden is still not historically high,” Richmond Federal Reserve President Tom Barkin said in comments recent. , this suggests that the full impact of higher rates is yet to come.”
Goldberg said higher borrowing costs will eventually start to take a toll as more Americans throw in the towel and buy homes, even with higher mortgage rates. In some cases, they may move to a new job or experience family changes that require a move. And more companies, over time, will also have to borrow at higher rates as their low-interest loans mature.
“The longer we stay here, the longer people won’t be able to wait,” Goldberg said. “If the Fed can wait out consumers, that would be a way for the longer rise to actually translate to Main Street.”
This story originally appeared on Time.com read the full story
