The sharp interest rate hikes of the past two years will likely take longer than previously expected to bring down inflation, several Federal Reserve officials have said in recent comments, suggesting there may be few, if any, rate cuts this year.
A major concern expressed by both Fed policymakers and some economists is that higher borrowing costs aren’t having as much of an impact as economics textbooks would suggest. Americans as a whole, for example, aren’t spending much more of their incomes on interest payments than they were a few years ago, according to government data, despite the Fed’s sharp rate increases. That means higher rates may not be doing much to limit many Americans’ spending, or cool inflation.
“What you have right now is a situation where these high rates aren’t generating more braking power on the economy,” says Joseph Lupton, global economist at J.P. Morgan. “That would suggest that they either need to stay high for longer or maybe even higher for longer, meaning rate hikes might come into the conversation.”
Fed Chair Jerome Powell said at a press conference earlier this month that an interest rate increase was “unlikely,” but he did not fully rule it out. Powell emphasized, however, that the Fed needed to take more time to gain “greater confidence” that inflation is actually returning to the Fed’s 2% target.
