Chances of Fed cutting interest rates diminish as inflation report looms

Published: 12 May 2024 at 10:08

Finance & Economics

The Federal Reserve is unlikely to cut interest rates this year as the latest inflation report could lead to a shift in monetary policy.

DEEP DIVE

'Something could break': The Fed risks recession, bank failures if it doesn't cut rates soon, economist Mark Zandi says

The Federal Reserve would be better off cutting interest rates as soon as possible, as there are parts of the economy at risk of "breaking" if rates don't come down, according to Mark Zandi, the chief economist of Moody's Analytics. Speaking to Yahoo Finance on Thursday, Zandi warned of the consequences that could arise if the Fed doesn't cut interest rates over the next few months. Keeping rates at their current level raises the risk of recession, and could expose other cracks in the financial system, Zandi warned. "Those rates are corrosive on the economy. They wear the economy down, and at some point, something could break.

High Mortgage Rates Linked to Inflation and Federal Reserve Policy

Average 30-year mortgage rates are currently at around 7%, the highest in five months, due to data showing a hot economy and inflation rising by 3.5% year over year in March. The Federal Reserve is hesitant to cut rates until inflation cools down to their 2% goal. Fed Chair Jerome Powell expressed concerns over the lack of progress in reducing inflation during a recent panel discussion, indicating that mortgage rates will likely remain high until the Fed gains more confidence in reaching its target.

Mortgage Rates Remain High Amid Inflation Concerns and Potential Rate Cuts

Average 30-year mortgage rates are in the high 6% range, spiking close to 7% post the latest inflation report, with expectations of rates possibly exceeding 7%. The Federal Reserve may not lower rates until inflation eases, influenced by upcoming data like the personal consumption expenditures price index. Investors anticipate a rate cut in September rather than June, keeping mortgage rates elevated for now but potentially decreasing later in 2024.

First-Quarter Economic Growth Estimate and Unemployment Figures in the US

The Commerce Department is expected to report a slowing first-quarter economic growth rate of 2%, down from 3.4% in the previous quarter, with strong consumer spending amid high borrowing rates and inflation pressures. Unemployment benefits applications have remained steady at 212,000, supporting consumer spending and justifying the Federal Reserve's high interest rates to control inflation. The Federal Reserve is monitoring inflation closely and analysts predict a year-over-year inflation increase to 2.6%.

US Job Openings Decline in March but Remain at Historically High Levels

In March, US job openings decreased to 8.5 million, the lowest level in over three years, while the number of Americans quitting their jobs also dropped to the lowest since January 2021. Despite the decline, job openings are still historically high. The Federal Reserve raised interest rates 11 times since March 2022 to combat inflation, but the economy continued to grow, with unemployment staying below 4% for 26 consecutive months. Economists are hopeful for a 'soft landing' scenario where inflation decreases and the economy remains stable.

US workers' wages and benefits grow in the first quarter of 2024, raising inflation concerns at the Federal Reserve

During the first quarter of 2024, US workers' compensation, as measured by the Employment Cost Index, increased by 1.2%, higher than the previous quarter's 0.9% rise. The year-on-year growth stood at 4.2%. The Federal Reserve is concerned that this wage growth could lead to higher inflation, with prices rising for rents, car insurance, and healthcare. Despite previous hints at rate cuts, the Fed now emphasizes waiting for inflation to decline before making any moves, considering the persistent wage growth as a factor in their decision-making process.