WASHINGTON (AP) — The sharp interest rate hikes of the past two years will likely take longer to drive down inflation than previously expected, several Federal Reserve officials said in recent comments, suggesting there may be few or no rate cuts this year.
A big concern expressed by both Fed policymakers and some economists is that rising borrowing costs aren't having as big an impact as economics textbooks suggest. For example, government data shows that despite the Fed's sharp rate hikes, Americans as a whole aren't spending much more of their income on interest payments than they did a few years ago. That means higher interest rates may not do much to curb spending for many Americans or to keep inflation in check.
“As things stand, these high interest rates are not creating any additional brakes on the economy,” said Joseph Lupton, global economist at JPMorgan. “This suggests that interest rates may need to remain higher for longer or even higher, meaning rate hikes could be on the table.”
Fed Chairman Jerome Powell said a rate hike was “unlikely” at a press conference earlier this month, but didn't rule it out entirely. But he stressed that the Fed needs more time to gain “greater confidence” that inflation is actually on its way back to the Fed's 2% target.
“I think the Fed is saying that rate hikes aren't as realistic as the market was hoping,” said Gennady Goldberg, an economist at TD Securities.
Dallas Fed President Lori Logan reportedly said Friday that it was “premature to think” about cutting interest rates. He also suggested it was unclear whether the Fed's interest rates were high enough to keep inflation in check. Logan is one of 19 members of the Fed's interest rate-setting committee but has not voted on rate decisions this year.
If borrowing costs remain high for a long period of time, it's sure to disappoint many, from Americans hoping for lower mortgage rates before buying a home, to Wall Street traders eager for a rate cut, to President Joe Biden, who is likely to benefit from lower rates during his re-election campaign.
The government is due to release its April inflation report on Wednesday, and economists expect inflation to fall slightly to 3.4% from 3.5% in March. But it's up from 3.1% in January after falling sharply last year, raising concerns that progress in curbing inflation may be stalling.
The Federal Reserve raised interest rates to a 23-year high of 5.3% in an effort to rein in inflation, which peaked at 9.1% in June 2022.
But despite this sharp increase, Americans spent on average just 9.8% of their after-tax income on interest and principal payments on their debt in the fourth quarter of last year. Two years ago, before the Fed raised interest rates, the figure was 9.5%, a historically low percentage.
Why hasn't this number gone up? Over the past 15 years, while the Fed kept interest rates near zero to boost the economy, millions of American homeowners refinanced their mortgages at extremely low interest rates. As a result, mortgage rates have remained low and the Fed's policies have had little fiscal impact. Consumers who paid off their car loans or took out low-interest five-year car loans before interest rates rose have also been largely unaffected.
The average interest rate on a new 30-year mortgage is nearly 7.1%, according to mortgage giant Freddie Mac. But by Goldberg's calculations, the average interest rate on all outstanding mortgages is just 3.8%, not far from the 3.3% it was at when the Fed began raising rates. The gap between new and average outstanding rates is the widest since the 1980s.
“One of the things we're hearing is that people haven't yet felt the impact of higher mortgage rates because many Americans refinanced their mortgages when mortgage rates fell during the pandemic,” Federal Reserve President Neel Kashkari said last week. “If that's true — and I think there is some truth to that — it may take longer for the Fed's rate hikes to be fully felt in the housing market and the economy as a whole.”
Many large companies also locked in low interest rates before the Fed began raising rates, further cushioning the impact of rising borrowing costs.
Regarding the Fed's policy rate, Kashkari said, “I think the most likely scenario is that we stay where we are now, which is maintaining the status quo for a long period of time.”
There are signs that rising interest rates are increasing financial hardship for many Americans, with delinquencies on credit cards and auto loans on the rise, and many younger Americans are increasingly worried that rising mortgage costs will make it impossible for them to afford homes.
But delinquency rates are rising from very low levels and have not yet reached historically high levels, as pandemic-era stimulus checks and rising incomes have allowed many people to pay down their debts over the past few years.
And Americans as a whole have a much lower debt-to-income ratio than they did during the housing bubble 15 years ago, Lupton noted.
“Pandemic-era debt repayments and refinancings have protected consumers and businesses from rising interest rates, so total interest burdens have not yet reached historically high levels,” Federal Reserve Bank of Richmond President Tom Barkin said in recent comments. “To me, the full impact of rising rates has yet to be felt.”
Goldberg said rising borrowing costs will ultimately hurt as more Americans buy homes despite rising mortgage rates — in some cases because of job or family changes that require them to relocate — and as lower-interest loans expire, more businesses will be forced to borrow at higher rates.
“The longer it stays here, the more impatient people are going to be,” Goldberg said. “If the Fed can make consumers wait, that's one way that high interest rates over a long period of time actually get filtered down to Main Street.”