Source: Jin10 Data

The US economy seems to be heading in a direction that will make it difficult for Americans to get the long-awaited relief from high interest rates.

This situation is referred to as a 'soft landing', where the economy continues to grow but in a way that reignites inflation and hinders the Fed's ability to cut rates. The fact that borrowing costs have not decreased will impact everyone: shoppers looking for lower prices, borrowers seeking more favorable rates, and homebuyers expecting more attractive mortgage terms.

A large amount of data currently released supports the idea that the US economy may not experience a 'soft landing'.

The latest data is the inflation report released on Thursday, which shows a 2.4% year-on-year increase in the September CPI index, slightly slower than the previous month but higher than the expected 2.3%.

Before this was the September nonfarm payrolls report, which outperformed expectations. The US added 0.254 million jobs in the month, bringing the unemployment rate down to 4.1%. At the same time, the job growth in July and August was also revised upward.

These data indicate that after years of high interest rates, the US economy has not yet shown substantial weakening, and the Fed may not need to significantly ease monetary policy as previously expected.

This week, Ed Yardeni, President of Yardeni Research, stated that he believes the Fed will not cut rates again in the remaining time this year. In a report to clients this week, Yardeni said, "The strong job report in September and the upward revisions in July and August squash the hard landing scenario."

As the "no-landing scenario" is increasingly being incorporated into the bond market pricing, this week the 10-year US Treasury yield has surpassed 4% for the first time, affecting a key area of the economy - housing.

Since the significant interest rate cuts by the Federal Reserve, the 30-year mortgage rates have been climbing instead of decreasing. The impact of further rate cuts on mortgage costs remains uncertain and will depend on the bond market's reaction to future data.

There is also a secondary risk - as the economy regains momentum, inflation may once again become a problem, solidifying the prospect of long-term high rates, a prospect many abandoned after the Fed's substantial rate cuts last month. Megan Horneman, Chief Investment Officer at Verdence Capital Advisors, said on Monday, "Stronger job growth could lead to price increases, further intensifying the Fed's work. We believe the employment report rules out the possibility of another 50 basis point rate cut at the November meeting."

Steven Blitz, Chief US Economist at TS Lombard, also expressed a similar view in a report on Tuesday. He said,

"The Fed will not cut the federal funds rate to 3%, but this round's final rate will ultimately be too low, and will remain low for too long. Inflation will then rebound, and the Fed will raise interest rates again earlier than anyone anticipates. The biggest risk in the Fed's rate cuts and aggressive guidance, the risk that has not been priced into the market, is that the US economy does not land at all."

These are unpleasant news for American consumers who have been hoping for relief from high borrowing costs for the past two years.

According to the Fed's data, in August, the credit card loan rates for commercial banks rose to 21.7%, the highest rate recorded in at least the past 20 years. The new car loan rates for 48 months in August also increased to 8.6%, the highest level in over a decade.

Philadelphia Fed data shows that consumer mortgage lending volume at large banks also significantly declined to $44 billion in the second quarter, far below the peak of $212 billion in 2021.

Bankrate's senior economic analyst Mark Hamrick said, "Due to the decrease in benchmark interest rates, most potential borrowers have not felt the pressure of declining borrowing costs. For many Americans, financing and payments for large commodities remain difficult, whether it's housing, autos, or other household items that may be paid for with credit cards."

Editor / jayden