The war against inflation has never been easy, but the latest Consumer Price Index data demonstrates just how difficult the Federal Reserve’s fight is. In the months to come, the outcome of this battle will have major implications for your finances.
New jobs data shows U.S. prices in March increased by 3.5% compared to a year ago, warmer than expected by economists and it is the third month in a row that inflation has accelerated. Gasoline prices and rents contributed more than half to the monthly increase, the government announced Wednesday.
Result: the Fed’s current campaign to control inflation is far from over. This has consumers and investors wondering whether the central bank, which until recently was expected to cut its benchmark interest rate in June, could push back that timetable by several months, or even until 2025.
Fed Chairman Jerome Powell stressed that policymakers are closely watching inflation data to gauge their progress in returning it to its annual rate of 2%, its level before the pandemic-fueled price surge . A premature decision to cut the federal funds rate risks triggering additional inflationary pressures, he warned.
Responding to these concerns, another Fed official said last week that the central bank might not cut rates not at all in 2024 “if we continue to see inflation move sideways”.
Why is inflation increasing?
The two main factors contributing to higher-than-expected inflation in March were gas prices and rents. Rising pump prices are partly due to growing demand in the United States, according to AAA, which said the current national average of $3.62 per gallon is about 6.6% higher that a month ago.
Gas prices are also rising due to growing geopolitical tensions in Russia and the Middle East, with Brent crude surging past $90 a barrel earlier this month and the U.S. benchmark rising above $86.
Rents also remain rigid amid a housing shortage in the country. A few other items also contributed to this acceleration, including auto insurance, which jumped 22.2% from the previous year. The insurers were hiking bonuses to offset the increase in their costs due to extreme weather conditions and the higher cost of new automobiles.
Why might this impact the Fed’s decision to cut rates?
Raising interest rates is the Fed’s most effective weapon against inflation. This is because businesses and consumers curb spending when it is more expensive to borrow money, effectively dampening demand for goods and services, which can help reduce inflation.
But with inflation so far refusing to dissipate in 2024, economists say the Fed has less reason to cut rates, at least in the near term.
What is the current Federal Reserve interest rate?
The current federal funds rate – which banks charge each other for short-term loans – is in the range of 5.25% to 5.5%.
The Fed has raised rates 11 times since March 2022 as part of its fight to curb inflation. This has made borrowing money more expensive, with rates on credit cards, mortgages and other loans rising sharply over the past two years.
When will the Fed cut rates in 2024?
Before Wednesday’s inflation report, most economists had pegged the Fed’s June 12 meeting as the likely date for a rate cut in four years. Economists also forecast several cuts for the rest of 2024.
But due to the latest inflation figures, these experts are pushing back their forecasts.
“June is probably not in the cards” for a rate cut, noted Elyse Ausenbaugh, global investment strategist at JP Morgan Global Wealth Management, in an email.
If the Fed doesn’t cut rates in June, policymakers are unlikely to cut rates before September because little economic data is released between their June and July meetings that could change their thinking, noted Ryan Sweet , chief U.S. economist at Oxford Economics, in a study. research note Wednesday.
What impact could a delayed rate cut have on your money?
The first impact was felt on the stock market on Wednesday, with Wall Street send stocks sharply lower.
Expectations that the Fed would soon cut rates have fueled a 20% rise in the S&P 500 since Halloween. That’s because lower rates would help boost consumer and business spending, which would encourage investors to pay higher prices for stocks, bonds, cryptocurrencies and other investments.
But as that seems less likely in the near term, investors pulled back on Wednesday. If rate cuts come later than expected in 2024, consumers could face higher borrowing costs for a longer period. Auto loans, credit card rates and other loans are based on the Fed’s benchmark rate, so a higher rate means consumers won’t get a break anytime soon.
Mortgage rates, which hover around 7%, are also influenced by the Fed’s benchmark rate, although they also reflect other factors, like bond yields and inflation. Home loan rates will likely be unchanged in the short term due to factors such as a strong job market and demand for housing, according to Lawrence Yun, chief economist at the National Association of Realtors.
Is there any benefit to interest rates remaining high?
If there is a glimmer of hope, it is for savers given that some high interest savings accounts, certificates of deposit and other savings instruments now offer interest rates of 5% or more. If the Fed delays the rate cut, it is likely that savers will be able to benefit from favorable rates for longer into 2024.
That means consumers could put money aside in a high-interest savings account or CD and earn a rate 1.5 to 2 percentage points higher than the current inflation rate. This is better than leaving the money in a checking account that might earn little or no interest, effectively eroding the value of your money due to the impact of inflation.
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