Market hopes that the Fed will cut interest rates several times this year are gradually fading. A series of recent remarks by Federal Reserve officials highlights that they intend to keep borrowing costs high for as long as necessary to curb continued high inflation.

One key reason to delay interest rate cuts is that the inflationary pressure plaguing the economy is largely driven by lingering forces — from apartment rents to car insurance to hospital prices. Although Federal Reserve officials say they expect prices to cool down eventually in these areas, they have also hinted that they will keep waiting for as long as needed.

However, the willingness of Federal Reserve policymakers to keep key interest rates at their highest level in 20 years, thereby keeping the costs of mortgages, car loans, and other forms of consumer borrowing high, is also risky.

The Federal Reserve's task is to balance keeping interest rates high enough to control inflation and not high enough to damage the job market. Although most indicators show that economic growth and recruitment are still healthy, some economic indicators have begun to show signs of weakness. The longer the Federal Reserve keeps the benchmark interest rate high, the greater the risk of causing an economic downturn.

Meanwhile, polls show that as the presidential election approaches, rising rents, groceries, and gasoline prices have angered voters, and former US President Trump blamed Biden entirely for the price increase.

Under Powell's leadership, the Federal Reserve raised the benchmark interest rate by 5 percentage points from March 2022 to June 2023. This is the fastest rate hike in 40 years. According to the Federal Reserve's preferred measurement, the inflation rate has dropped from 7.1% in June 2022 to 2.7% in March this year.

However, the same indicator shows that housing prices rose at an accelerated pace in the first three months of 2024, breaking the steady slowdown in inflation last year. Economists expect the April PCE price index to be announced on Friday to increase 2.7% year over year.

Another inflation indicator released by the US this month showed a slight decline in CPI in April. However, since inflation remains stubbornly above the Federal Reserve's target level, Wall Street traders now expect the Fed to cut interest rates only once in November this year. Even so, it's hard to say that this is a foregone conclusion. Investors think the possibility that the Federal Reserve will cut interest rates in November is 63%, down from 77% a week ago.

Last week, Goldman Sachs became the latest major bank to abandon its bet on the Fed's July interest rate cut. However, the bank still believes that the Fed will cut interest rates twice this year and postponed the first rate cut until September. The Oxford Institute of Economics issued a similar appeal last month. Bank of America expects the Federal Reserve to cut interest rates only once in December this year. Just a few months ago, many economists also predicted that the Federal Reserve would cut interest rates for the first time in March of this year.

Cleveland Federal Reserve Chairman Meester said this month, “We need to collect more data in the next few months to have a clearer understanding of the inflation outlook. I now think it will take longer to reach the 2% target than I thought before.”

As more data is released, there are also signs that the economy is cooling down. For example, data from the New York Federal Reserve shows that more and more Americans, especially young people, are delinquent on credit card bills. In the first quarter of this year, the proportion of credit card debt overdue for 90 days or more reached 10.7%. This is the highest ratio in 14 years.

Julia Coronado, president of MacroPolicy Perspectives and a former Federal Reserve economist, said, “There are many signs that consumers are losing some momentum, recruitment demand is cooling down, and you may see a further slowdown.”

But Coronado and other economists also believe that the latest trends suggest that after a period of rapid growth, the economy may simply be normalizing. Companies are still hiring, but the pace of recruitment has slowed since the beginning of the year. According to the data, the number of Americans traveling on the Memorial Day weekend reached a record high, which shows that they are confident in their finances.

One reason inflation is still above the Federal Reserve's target is that although most other sectors of the US economy have weathered the pandemic, distortions caused by the pandemic have kept some prices high.

Two years ago, housing costs, starting with apartment rents, rose sharply as many Americans sought additional living space during the pandemic. Rental costs are currently slowing down, rising 5.4% year over year in April, down from 8.8% in the same period last year. But they're still growing faster than they were before the COVID-19 pandemic.

Last month, housing inflation accounted for almost two-thirds of the year-on-year increase in core inflation. Powell and other Federal Reserve officials acknowledged that they had expected rents to fall faster than they actually were.

However, since mid-2022, the cost of the new lease has dropped drastically. A new rental apartment rent index calculated by the government shows that compared to the same period last year, rents for the first three months of 2024 increased by only 0.4%. However, it will take some time for newer, lower-priced rents to be reflected in the government's inflation indicators.

Federal Reserve Vice Chairman Jefferson said last week, “Market rents adapt more quickly to economic conditions than rents collected by landlords from existing tenants. This lag shows that the sharp rise in market rents during the pandemic is still being passed on to existing rents, which may keep housing service inflation high for some time.”

Auto insurance costs soared nearly 23% from the same period last year, a sharp increase reflecting the sharp rise in new and used car prices during the pandemic. Insurers now have to pay more to replace end-of-life cars and are therefore charging customers more. Former Federal Reserve economist Claudia Sahm said:

“This relates to what happened in 2021, and you can't go back and change that.”

Editor/Somer