WASHINGTON (AP) — Expectations for a Federal Reserve interest rate cut this year are steadily fading, with a series of recent comments from Fed officials underscoring their intention to keep borrowing costs high as long as necessary to rein in stubbornly high inflation.
The main reason for the delay in cutting rates is the lingering effects of the pandemic on inflationary pressures that are plaguing the economy and affecting everything from apartment rents to auto insurance to hospital bills. Fed officials have said they expect inflation in those areas to eventually subside but have signaled they are willing to wait however long it takes.
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But policymakers' willingness to keep interest rates at their highest levels in two decades carries its own risks as it could keep the costs of mortgages, auto loans and other consumer borrowing very high.
The Fed's mission is to strike a balance between keeping interest rates high enough to keep inflation in check, but not so high that they damage the job market. While most indicators show that growth and employment are in healthy shape, some economic indicators are showing signs of weakness. The longer the Fed keeps its benchmark interest rate high, the greater the risk of triggering a recession.
Meanwhile, as the presidential election campaign heats up and polls show rising rent, grocery and gasoline prices are angering voters, Donald Trump is trying to pin the blame for rising prices squarely on President Joe Biden.
The Fed, under Chairman Jerome Powell, raised interest rates by 5 percentage points between March 2022 and June 2023, the fastest increase in four decades, to bring inflation down to its 2% target. Inflation, according to the Fed's preferred measure, has fallen sharply from 7.1% in June 2022 to 2.7% in March.
But the same index showed prices accelerating in the first three months of 2024, breaking down a steady slowdown last year. Economists expect the government to report on Friday that the index rose 2.7 percent in April from a year earlier.
A separate government inflation gauge released this month suggested prices fell slightly in April. But with inflation stubbornly above the Fed's target, Wall Street traders are only expecting a rate cut this year in November. And even that is far from a sure thing: Investors see a 63% chance of a November rate cut, down from 77% a week ago.
Last week, Goldman Sachs economists delayed the first of two expected rate cuts this year to September, becoming the latest analysts to abandon a July rate cut. Oxford Economics made a similar forecast last month. Bank of America now sees just one rate cut this year, in December. Just a few months ago, many economists were expecting the first rate cut in March.
“We need more data in the coming months to provide a clearer picture of the inflation outlook,” Cleveland Federal Reserve Bank President Loretta Mester said this month. “We now believe it will take longer to reach our 2 percent goal than we previously thought.” (Mester is one of the 12 governors who vote on the Fed's interest-rate policy this year.)
As more data comes in, there are some signs the economy is cooling a bit: More Americans, especially younger people, are falling behind on their credit card payments, for example: The percentage of card debt that was 90 days or more past due reached 10.7% in the first quarter, the highest rate in 14 years, according to the Federal Reserve's New York office.
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Hiring is also slowing, with companies posting fewer jobs even as job advertisements remain high.
And more companies, including Target, McDonald's and Burger King, are emphasizing price cuts and cheaper sales to attract financially struggling consumers. These actions may help tame inflation in the coming months, but they also highlight the difficulties facing low-income Americans.
“There's lots of signs that the consumer is losing some momentum and that demand for jobs is cooling,” said Julia Coronado, a former Fed economist and president of MacroPolicy Perspectives. “We could be seeing further slowdown.”
But Coronado and other economists also see the recent trends as a sign the economy is normalizing after a period of rapid growth. Businesses are still hiring, but at a slower pace than earlier in the year. And data shows that more Americans traveled over Memorial Day weekend than ever before, a sign that they're feeling more confident financially.
One reason inflation is still above the Fed's target is that distortions caused by the pandemic have kept prices high in some areas even as most other parts of the economy have weathered the pandemic.
Housing costs, led by apartment rents, soared two years ago as many Americans sought more space during the pandemic. Rents are now slowing — rents rose 5.4% year over year in April, down from 8.8% the year before — but they're still rising at a faster pace than before the pandemic.
Rent, homeownership and hotel costs accounted for two-thirds of the annual increase in “core” inflation, which excludes volatile food and energy costs, last month. Powell and other Fed officials have acknowledged that they expected rents to fall more quickly than they have.
But new rents have been falling sharply since mid-2022. According to the government's rent index for new apartments, rents rose just 0.4% year-on-year in the first three months of 2024. But it takes time for newer, more affordable rents to be reflected in the government's inflation gauge.
“Market rents adjust to economic conditions more quickly than the rents that landlords charge existing tenants,” Fed Vice Chairman Philip Jefferson, an aide to Chairman Powell, said last week. “This lag suggests that the large increases in market rents during the pandemic are still being passed on to existing rents, and that housing inflation could remain elevated for some time yet.”
Auto insurance rates are up about 23% from a year ago, a big increase that reflects soaring new and used car prices during the pandemic as insurers have had to pay more to replace cars that are totaled, resulting in higher bills for customers.
“This is about what happened in 2021,” said Claudia Thurm, chief economist at New Century Advisors and a former Fed economist. “You can't go back and change it.”