Persistent inflation is dashing hopes for a Fed rate cut in 2024

Hopes that the Federal Reserve will cut interest rates this year are steadily fading, with a series of recent comments from Fed officials underscoring their intention to keep borrowing costs high for as long as necessary to curb a persistently high inflation.

A key reason for the delay in rate cuts is that the inflationary pressures plaguing the economy are largely being driven by lingering forces from the pandemic, for items ranging from apartment rents to auto insurance to hospital prices. . Although Federal Reserve officials say they expect inflation in those areas to eventually cool, they have signaled they are willing to wait as long as necessary.

However, the authorities’ willingness to keep their key rate at a two-decade high – thus keeping the costs of mortgages, car loans and other forms of consumer borrowing painfully high – carries its own risks.

The Fed’s mandate is to strike a balance between keeping rates high enough to control inflation but not so high that they hurt the labor market. While most measures show growth and hiring remain healthy, some indicators of the economy have begun to reveal signs of weakness. The longer the Fed keeps its benchmark rate elevated, the greater the risk of causing a recession.

At the same time, as polls show that more expensive rent, food and gasoline are angering voters as the presidential campaign heats up, Donald Trump has sought to place the blame squarely on President Joe Biden for the higher prices.

The Federal Reserve, led by Chairman Jerome Powell, raised its benchmark rate by 5 percentage points from March 2022 to June 2023 (the fastest such increase in four decades) to try to bring inflation back down to its 2% target. By the Federal Reserve’s preferred measure, inflation has fallen from 7.1% in June 2022 to 2.7% in March.

However, that same indicator showed that prices accelerated in the first three months of 2024, interrupting last year’s constant slowdown. On Friday, economists expect the government to report that this measure rose 2.7% in April from a year earlier.

A separate inflation gauge the government reported this month suggested prices cooled slightly in April. But with inflation remaining stubbornly above the Federal Reserve’s target level, Wall Street traders now expect only one rate cut this year, in November. And even that is far from certain, with investors putting the probability of a cut in November at 63%, up from 77% a week ago.

Last week, Goldman Sachs economists became the latest analysts to give up on a rate cut in July, pushing back to September their forecast for the first of two cuts they expect this year. 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 had predicted the first rate cut for March of this year.

“We will need to accumulate more data in 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 believe that reaching our 2% target will take longer than she previously thought.” (Mester is among 12 officials who will vote on the Federal Reserve’s rate policy this year.)

As more data accumulates, so do some signs that the economy is cooling a bit. More Americans, particularly younger adults, are falling behind on their credit card bills, for example, and the share of card debt 90 days or more past due reached 10.7% in the first quarter, according to the New York branch of the Federal Reserve. That is the highest proportion in 14 years.

Hiring is also slowing, with companies posting fewer vacancies, although job postings remain high.

And more companies, including Target, McDonalds and Burger King, are highlighting price cuts or cheaper deals to try to attract financially struggling consumers. Their actions could help reduce inflation in the coming months. But they also underscore the difficulties faced by low-income Americans.

“There are many signs that consumers are losing steam and hiring demand is cooling,” said Julia Coronado, former Federal Reserve economist and president of MacroPolicy Perspectives. “You could see a further 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. Companies continue to hire, although at a more modest pace than at the beginning of the year. And data suggests that Americans traveled in record numbers over the Memorial Day weekend, a sign that they are confident in their finances.

One reason inflation remains above the Federal Reserve’s target is that distortions from the pandemic continue to keep prices elevated in several areas, even as much of the rest of the economy has weathered the pandemic.

Housing costs, led by apartment rents, rose two years ago after many Americans sought additional living space during the pandemic. Rental costs are now slowing: They rose 5.4% year-on-year in April, down from 8.8% a year earlier. But they are still increasing faster than before the pandemic.

Last month, rent and home ownership, along with hotel prices, accounted for two-thirds of the annual increase in “core” inflation, which excludes volatile food and energy costs. Powell and other Federal Reserve officials have acknowledged that they expected rents to fall more quickly than they did.

However, the cost of a new lease has fallen since mid-2022. An indicator of rents for newly let apartments calculated by the government shows they increased by just 0.4% in the first three months of 2024 compared to past year. However, it takes time for newer, cheaper rents to be incorporated into the government’s inflation measure.

“Market rents adjust more quickly to economic conditions than what landlords charge their current tenants,” Philip Jefferson, vice chairman of the Federal Reserve and a top Powell lieutenant, said last week. “This delay suggests that the large increase in market rents during the pandemic is still being passed through to existing rents and may keep housing services inflation elevated for some time to come.”

The cost of car insurance has soared nearly 23% from a year ago, a huge jump that reflects the rise in new and used car prices during the pandemic. Insurance companies now have to pay more to replace wrecked cars and are charging their customers more as a result.

“These are things that happened in 2021,” said Claudia Sahm, chief economist at New Century Advisors and a former Federal Reserve economist. “You can’t go back and change that.”

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