Fed Not in a Hurry to Lower Interest Rates
As Americans have realized, a byproduct of high inflation is typically high interest rates. As inflation begins to rise, the Federal Reserve will likely raise its benchmark fed funds rate. The fed funds rate often serves as a basis for many types of consumer debt. As the fed funds rate is raised, so typically do interest rates on credit cards, auto loans, bank loans, HELOCS and home mortgages, among others.
According to LendingTree, the average interest rate being charged on a new credit card is a blistering 24.62%. In 2020, the average rate was around 16%. For a 30-year fixed home mortgage, Bankrate notes the average interest rate being charged to homebuyers is 7.05%. In 2021, the average rate was below 3%. The average interest rate for a HELOC is even higher at 8.26%. Finally, Bankrate notes the average interest rate on a four-year loan for a new car is 7.38% while the same loan on a used car is 8.06%.
By raising interest rates, the Fed’s goal is to increase the cost of borrowing. The Fed hopes that by making it more expensive to buy goods and services on credit, consumer spending will inherently decline. As spending drops, inflationary pressures should gradually ease. That’s the economic rationale, at least. From March 2022 through July 2023, the Fed raised the fed funds rate from near-0% to a level between 5.25%-5.5%, a 22-year high.
In 2024, the Fed gradually began to lower interest rates. By the end of last year, the fed funds rate had fallen to a level between 4.25%-4.5%, where it currently stands. But after years of being charged decades-high rates on their debt, both consumers and businesses remain hungry for even more interest rate reductions. However, based on the latest messaging from Fed Chair Jerome Powell, we should likely keep our expectations in check.
In his press conference on Wednesday, Powell acknowledged that inflation remains stubbornly high. Moreover, it appears the Fed isn’t in any hurry to further lower rates any time soon. According to Wall Street insiders, Powell’s commentary suggests that the Fed’s progress in returning inflation to its 2% goal appears to have stalled.
Over the past few months, the Fed has seen inflation re-ignite and start to trend higher again. In December, the Consumer Price index reported that inflation jumped from 2.7% to 2.9%, a five-month high.
The Fed now finds itself in a very precarious situation. High interest rates continue to take a toll on the U.S. economy. But if the Fed lowers interest rates either too fast or too soon, it risks a sudden surge in consumer spending that could likely push consumer prices, and inflation, even higher. For now, it seems, the Fed appears willing to play the waiting game on any further interest rate reductions.
Mark M. Grywacheski, Investment Advisor
Quad Cities Investment Group is a Registered Investment Adviser.
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