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Are US interest rates high enough to beat inflation? E…

WASHINGTON (AP) — The sharp interest rate hikes of the past two years will likely take longer than previously expected to reduce inflation, several Federal Reserve officials have said in recent comments, suggesting there may be little or no progress this year. no interest rate cuts will take place. .

A major concern expressed by both Fed policymakers and some economists is that higher borrowing costs may not have as big an impact as economic textbooks suggest. For example, Americans as a whole are not spending much more of their income on interest payments than they did a few years ago, according to government data, despite the Fed’s sharp rate hikes. That means higher interest rates may not do much to restrain the spending of many Americans or cool inflation.

“What you have now is a situation where these high interest rates are not generating more braking force on the economy,” said Joseph Lupton, global economist at JP Morgan. “That would indicate they either need to stay high for longer, or perhaps even stay high for longer, which means rate hikes could play a role.”

Fed Chairman Jerome Powell said at a news conference earlier this month that a rate hike was “unlikely,” but he did not completely rule it out. However, Powell emphasized that the Fed needed to take more time to gain “more confidence” that inflation will actually return to the Fed’s 2% target.

“I don’t think the Fed rate hikes are as on the table as the market expected,” said Gennadiy Goldberg, an economist at TD Securities.

On Friday, Dallas Federal Reserve President Lorie Logan said it was “simply too early to be thinking” about rate cuts, according to news reports. She also suggested that it is unclear whether the Fed’s interest rate is high enough to curb inflation. Logan is one of them. of the 19 officials on the Fed’s rate-setting committee, although it will 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 re-election campaign would likely benefit from lower interest rates .

The government will release its April inflation report on Wednesday, and economists predict it will show inflation has fallen slightly to 3.4% from 3.5% in March. However, inflation has risen from 3.1% in January after a sharp decline last year, raising concerns about whether progress in reducing inflation has stalled.

The Fed has raised its policy rate to a 23-year high of 5.3% in an effort to curb inflation, which peaked at 9.1% in June 2022.

But despite these sharp increases, Americans spent an average of just 9.8% of their after-tax income on paying interest and servicing their debts in the fourth quarter of last year. Two years earlier – before the Fed raised rates – they spent 9.5%, a historically low rate.

Why has this figure not increased further? Millions of American homeowners have refinanced their mortgages at very low rates over the past fifteen years, while the Fed largely kept policy rates near zero to stimulate the economy. As a result, their mortgages remain low and their finances are largely unaffected by Fed policy. Consumers who paid off their cars, or who took out a low-interest car loan over five years before interest rates rose, also felt little impact.

The average rate for a new 30-year mortgage is almost 7.1%, according to mortgage giant Freddie Mac. But Goldberg calculates that the average interest rate on all outstanding mortgages is just 3.8%, not much higher than 3.3% when the Fed started raising rates. The difference between the new rates and the average outstanding rate is the highest since the 1980s.

“One of the things we’re hearing is that maybe because so many Americans refinanced their mortgages as mortgage rates fell during the pandemic … people aren’t feeling the impact of higher mortgage rates yet,” said Neel Kashkari, chair of the Federal Reserve’s division. in Minneapolis. “If that’s true, and I think there’s some truth to that, it could take longer” for the Fed’s rate hikes to “be fully felt by the housing market and by the broader economy.”

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

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

There are signs that higher interest rates are causing more financial problems for many Americans as delinquencies on credit cards and auto loans increase. And many younger Americans are increasingly concerned that with mortgage costs so high, they will no longer be able to afford a home.

Yet delinquencies are rising from very low levels and are not yet historically high. Pandemic-era stimulus and rising incomes have helped many people pay off debt in recent years.

And Americans have far less debt overall as a percentage of their income than they did during the housing bubble 15 years ago, Lupton notes.

“With both consumers and businesses protected from higher interest rates thanks to debt payments and refinancing during the pandemic, their overall interest burden is not yet historically high,” Tom Barkin, president of the Richmond Federal Reserve, said in recent comments. That suggests the full impact of higher rates is yet to come.”

Goldberg said higher borrowing costs will eventually become a pinch as more Americans throw in the towel and buy homes, even with higher mortgage rates. In some cases, they are moving for a new job or have family changes that require a move. And over time, more companies will also need to borrow at higher interest rates as their low-interest loans mature.

“The longer we stay here, the more people won’t be able to wait,” Goldberg said. “If the Fed can hold off on consumers, that would be a way to get them to stay longer, which actually translates to Main Street.”