WASHINGTON (AP) — From Wall Street traders to auto dealers to home buyers, Americans are eager for the Federal Reserve to begin lowering interest rates and easing the burden on borrowers.
The Fed is widely expected to do so, perhaps several times this year. Inflation rose at an annual rate of about 2% (the Fed’s target level) in the second half of 2023, as measured by the Fed’s recommended metrics. But this week, several central bank officials stressed they were not ready to pull the trigger yet.
With inflation largely defeated and the Fed’s key interest rate at a 22-year high, why isn’t now the time to cut rates?
Most Fed policymakers say they are optimistic that inflation pressures will continue to decline even as the economy and job market continue to grow. But they also warn that with the economy looking so strong, there is a real risk that prices could rise again.
Others worry that cutting rates now and causing inflation to pick up again could force the Fed to reverse course and raise rates again.
“History tells many stories of inflationary head fakes,” Richmond Fed President Tom Barkin said in a speech Thursday.
Barkin noted that inflation seemed defeated in 1986, when Paul Volcker was Fed chairman.
“The Fed lowered interest rates, but the next year inflation rose again, so the Fed reversed course,” he said.
“We’d like to avoid that roller coaster if we can,” said Barkin, who is one of 12 Fed officials voting on interest rate policy this year.
Several officials said they wanted more time to see if inflation continued to subside. In the meantime, they point out, the economy is strong enough to grow without rate cuts. Last month, for example, American employers hired heavily, but the unemployment rate remained at 3.7%.
“It’s going to be an ice age and it’s going to take some time,” said Stephen Blitz, chief U.S. economist at Global Data TS Lombard. “They’ll say, ‘I don’t know, but I’ll wait because I can afford to wait.'”
The strength of the economy also raises questions about how effective the Fed’s 11 rate hikes have been. If rising borrowing rates are only barely keeping the economy in check, some officials may conclude that interest rates should remain high for a long time or that there is little need to cut them.
“I don’t feel there’s a sense of urgency here,” Cleveland Fed President Loretta Mester told reporters Tuesday. “If things progress as expected later this year, we could start cutting rates.”
But their cautiousness comes with risks.now the economy is emerging We are on track for a “soft landing”In that case, inflation would be defeated without causing a recession or high unemployment. But the longer borrowing rates remain high, the greater the risk that more businesses and consumers will stop borrowing and spending, weakening the economy and sliding into recession.
High interest rates could also exacerbate the woes of banks with bad commercial real estate loans, making it harder to refinance them.
High borrowing costs are a problem at David Kelleher’s Chrysler Jeep dealership in suburban Philadelphia. Kelleher recalled that just two and a half years ago, his customers were able to get him a car loan for less than 3%. Now they are lucky to get 5.5%.
Three years ago, for example, a customer who had a $400 monthly payment on a car lease found his monthly payment closer to $650 because vehicle prices had increased significantly and interest rates had increased. This trend causes many of his customers to turn to lower-priced used cars or not buy them at all.
“We need the government to understand that it has addressed the interest rate issue and achieved its objective of reducing inflation,” Mr Kelleher said. “If interest rates can come down, I think more cars will start selling.”
Mr. Kelleher will likely get his wish by May or June, when most economists expect the Fed to begin lowering its benchmark interest rate, currently at about 5.4%. In December, all but two of the 19 policymakers participating in the Fed’s policy discussions said they expected the Fed to cut rates by the end of the year. (Of these his 12 out of 19 can actually vote on interest rate policy each year.)
But since then, economic growth has accelerated.In the last three months of last year, the economy Expanding at an unexpectedly strong annual rate of 3.3%. A survey of manufacturers, retailers, banks, shippers and other service providers also reported an improvement in business performance last month.
Taken together, the latest reports suggest that rather than heading for a soft landing, the economy may be headed for what some economists call a “no-landing.” This implies a scenario in which the economy remains strong and inflation is a continuing threat, potentially outperforming the Fed’s target. Under this scenario, the Fed would be forced to keep interest rates high for an extended period of time.
Chairman Powell said last week that the Fed wants to see continued “strong growth” but that a strong economy risks pushing up inflation.
“I think there is a risk that inflation will accelerate,” Powell said. “I think the bigger risk is that it stabilizes well above 2%. … That’s why we’re keeping our options open here and not rushing.”
Other officials this week said the Fed is trying to balance the risk of cutting rates too soon, which could cause another spike in inflation, and the risk of holding rates too high for too long, which could trigger a recession. He emphasized that.
“At some point, lower interest rates may be appropriate as inflation and the labor market continue to cool,” recently appointed Fed Director Andrea Kugler said Wednesday in her first public address. . “On the other hand, if progress in eliminating inflation stalls, it may be appropriate to keep the target range stable at current levels for an extended period of time.”
Some analysts point to signs that the economy is becoming more productive and efficient, accelerating economic growth without necessarily increasing inflation. However, productivity data is notoriously difficult to measure, and it may not take years for meaningful improvements to become apparent.
Still, “the economy could probably adopt higher interest rates than we thought in 2019, before the pandemic,” said Eric Swanson, an economist at the University of California, Irvine.
If that happens, it could not only delay the Fed’s rate cuts but also reduce their frequency. Fed officials still say they plan to cut rates perhaps three times this year, fewer than the five or six that some market analysts expect.
