Fed to Take Its Time on Interest Rates 05/13 06:04

   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.

   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.

   "The longer we stay here, the more people can't wait," Goldberg said. "If 
the Fed can wait out consumers, that would be one way that higher for longer 
actually translates to Main Street."