Comments by Fed officials signal few rate cuts in 2024
WASHINGTON — The sharp interest rate hikes of the past two years will likely take longer than previously expected to bring down inflation, several Federal Reserve officials have said in recent comments, suggesting there may be few, if any, rate cuts this year.
A major concern expressed by Fed policymakers and some economists is that higher borrowing costs aren’t having as much of an impact as economics textbooks would suggest. Americans as a whole, for example, aren’t spending much more of their incomes on interest payments than they were a few years ago, according to government data, despite the Fed’s sharp rate increases.
That means higher rates may not be doing much to limit many Americans’ spending or to cool inflation.
“What you have right now is a situation where these high rates aren’t generating more braking power on the economy,” said Joseph Lupton, global economist at J.P. Morgan. “That would suggest that they either need to stay high for longer or maybe even higher for longer, meaning rate hikes might come into the conversation.”
Fed Chair Jerome Powell said at a news conference this month that an interest rate increase was “unlikely,” but he did not fully rule it out. Powell emphasized, however, that the Fed needed to take more time to gain “greater confidence” that inflation is returning to the Fed’s 2% target.
“I think the Fed’s telling you hikes are not quite as on the table as the market was expecting,” said Gennadiy Goldberg, an economist at TD Securities.
On Friday, Dallas Federal Reserve President Lorie Logan said that it is “just 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 quell inflation. Logan is one of the 19 officials on the Fed’s committee that sets interest rates, though she does not vote on rates this year.
Higher-for-longer 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 cut, to President Joe Biden, whose reelection campaign would likely benefit from lower rates.
On Wednesday, the government will release April’s inflation report, and economists forecast that it will show that inflation declined slightly to 3.4% from 3.5% in March. It has climbed from 3.1% in January, however, after falling sharply last year, raising concerns about whether progress in reducing inflation has stalled.
The Fed has pushed its key rate to a 23-year high of 5.3% in an effort to bring down inflation, which peaked at 9.1% in June 2022.
Yet despite those increases, Americans, on average, spent just 9.8% of their after-tax income paying interest and principal on their debts in last year’s fourth quarter. Two years earlier — before the Fed hiked rates — they spent 9.5%, a historically low percentage.
Why hasn’t the figure risen by more? Millions of American homeowners refinanced their mortgages at low rates during the past decade and a half, when the Fed mostly kept its key rate at nearly zero to bolster the economy.
As a result, their mortgages remain low and their finances largely unaffected by the Fed’s policies. Consumers who paid off their cars or took out low-rate five-year car loans before rates rose have also felt little impact.
The average rate for a new 30-year mortgage is nearly 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 3.3% when the Fed began to hike rates.
The gap between new rates and the average outstanding is the highest since the 1980s.