May 15, 2024

Bad news for shoppers: Inflation not going away

Posted May 15, 2024 1:00 PM

WASHINGTON (AP) — Federal Reserve Chair Jerome Powell said Tuesday that the central bank is unlikely to raise its key interest rate in response to signs of stubborn inflation and underscored his view that price increases would soon start to cool again.

Yet Powell, during a panel discussion in Amsterdam, said his confidence that inflation will ease “is not as high as it was” because price increases have been persistently hot in the first three months of this year. Powell stressed that the Fed’s preferred approach was to keep its benchmark rate at its current two-decade peak rather than increase it.

“I don’t think that it’s likely, based on the data that we have, that the next move that we make would be a rate hike,” Powell said. “I think it’s more likely that we’ll be at a place where we hold the policy rate where it is.”

Financial markets and economists have been hoping for signs that one or two Fed rate cuts might be coming this year, given that inflation is down sharply from its high in 2022. But with price pressures still elevated, Powell and other Fed officials have signaled that no rate cut is likely anytime soon.

Powell spoke hours after a report on U.S. producer prices showed that wholesale inflation picked up in April. On Wednesday, the government will issue the latest monthly report on consumer inflation, which is expected to show that price growth cooled a bit last month.

In his remarks Tuesday, Powell downplayed the wholesale price report, which also showed that some costs cooled last month, including for airfares, hospital visits and car insurance.

“I wouldn’t call it hot,” he said of the wholesale inflation data. “I would call it sort of mixed.”

Economists are divided over whether the high inflation figures this year reflect a re-acceleration in price growth or are largely echoes of pandemic distortions. Auto insurance, for example, has soared 22% from a year ago, but that surge may reflect factors specific to the auto industry: New car prices jumped during the pandemic, and insurance companies are now seeking to offset the higher repair and replacement costs by raising their premiums.

Other economists point to consistent consumer spending on restaurant meals, travel and entertainment, categories where in some cases price increases have also been elevated, possibly reflecting strong demand.

Powell said that upcoming inflation reports will reveal whether such factors are keeping inflation high or whether inflation will soon fall back to the Fed’s 2% target, as he said he expects. Inflation, which peaked at 9.1% in the summer of 2022, is forecast to slow to 3.4% in Wednesday’s latest report.

The Fed chair noted that rising rents are one key factor keeping inflation high. He called that “a bit of a puzzle” because measures of new apartment leases show new rents barely increasing. Such weaker data has apparently yet to flow into the government’s measures, which cover all rents, including for tenants who renew their leases. Though rents are still growing faster for tenants who renew leases, Powell said the government’s measures should eventually show rent growth easing.

The Fed chair also acknowledged that the economy “is different this time” because so many Americans refinanced their mortgages at very low rates before the Fed began raising borrowing costs in March 2022. Many large businesses also locked in low rates at that time.

“It may be,” he said, that the Fed’s rate policy “is hitting the economy not quite as strongly as it would have if those two things were not the case.”

Last week, Fed officials underscored that they were prepared to leave their key interest rate at 5.3%, the highest level in 23 years, as long as needed quell inflation.


WASHINGTON (AP) — 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 both 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 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 press conference earlier 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 actually 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 interest-rate setting committee, 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 it will show 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 sharp 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 very 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 who 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.

"One of the things we hear is that maybe because so many Americans refinanced their mortgages when mortgage rates dropped during the pandemic ... people are not feeling the bite of higher mortgage rates yet,” Neel Kashkari, president of the Federal Reserve's Minneapolis branch, said last week. “If that’s true, and I think there’s some truth to that, then it may take longer” for the Fed’s rate hikes “to be fully felt by the housing market and by the economy more broadly.”

Many large corporations also locked in low rates before the Fed began hiking, further limiting the impact of higher borrowing costs.

“I think the most likely scenario is where we are right now, which is just we stay put for an extended period of time,” Kashkari said, referring to the Fed's key rate.

There are signs that higher rates are causing more financial struggles for many Americans, as delinquencies on credit cards and auto loans rise. And many younger Americans are becoming increasingly concerned that, with mortgage costs so high, they will not be able to afford a home.

Yet delinquencies are climbing from very low levels and are not yet historically high. Pandemic-era stimulus checks and rising incomes allowed many people to pay down debt in the past few years.

And Americans, in total, are carrying much less debt as a percentage of their incomes than they did during the housing bubble 15 years ago, Lupton notes.

“With consumers and businesses alike sheltered from higher interest rates thanks to pandemic-era debt paydowns and refinancing, their aggregate interest burden is not yet historically elevated," Tom Barkin, president of the Richmond Federal Reserve, said in recent comments. “To me, that suggests the full impact of higher rates is yet to come.”

Goldberg said that greater borrowing costs will eventually start to bite as more Americans throw in the towel and purchase homes, even with higher mortgage rates. In some cases, they may move for a new job or have family changes that require a move. And more companies, over time, will have to borrow at higher rates as well, as their low-interest loans mature.