High interest rates aren’t going away anytime soon – a business economist explains why

Just a few months ago, investors were betting that 2024 would bring a slew of rate cuts.

But as a business economist, I think it’s clear that the latest economic data kept the Fed from easing at its last policy meeting. There are no signs of an impending recession. Employment is still quite strong: the US added 303,000 jobs in March 2024 and 270,000 in February, and the unemployment rate – at 3.8% in March – rose only slightly from 3.5% in March 2023. That is simply not big enough. to worry that high interest rates are slowing the economy too abruptly.

While it is true that inflation-adjusted gross domestic product growth, after a notable 4.8% annual increase in the fourth quarter of 2023, slowed significantly to 1.6% in the first quarter of 2024, slower growth is exactly what the Fed has been trying to achieve. engineer by raising interest rates. Controlling demand for goods and services slows price growth. That is still not a recession indication.

The inflation challenge

Reducing inflation to the Fed’s 2% target — a number Fed Chairman Jerome Powell repeated several times during his press conference — has been challenging, to say the least. The Fed began raising interest rates in early 2022. Initially it had some success in reducing inflation, which had peaked at around 9% that year. As Powell said, the decline in inflation has been historically rapid, partly due to both interest rate increases and easing international supply chain disruptions. But there has been little decline since June 2023, when inflation was 3.1%. Consumer price index growth has not fallen below 3% since March 2021.

One of the main reasons why inflation has remained high is that there are not enough workers. Economic growth is increasing the demand for labor, and the labor supply simply has not kept pace. The result is higher wages. With higher wages, companies elsewhere must cut costs, raise prices, or both, to maintain profitability.

Another major driver of inflation, which Powell has taken pains to mention, is rising rental costs. Higher mortgage rates have slowed the housing market significantly, and many Americans – especially young people – are renting instead of buying. The continued demand for apartments, combined with higher costs for maintenance and upkeep of rental properties, is putting pressure on rental prices.

Would walking be possible in the future?

The next interest rate decision, in June, will “unlikely” involve a hike, Powell said during his press conference. He also indicated that the current regime of high interest rates should be sufficient to curb inflation.

As he noted, new job openings have fallen from a peak of 12.1 million in March 2022 to 8.4 million in March 2024. While that is still high in absolute terms, it is a significant decline, indicating a slower pace of demand for labor. This should then reduce pressure on wages.

What about interest rate cuts? After all, some observers expected interest rates to start this summer. Based on the information I’m looking at right now, that’s just not going to happen. A move will not take place until September at the earliest. Until then, expect a sluggish housing market and expensive loans, but moderating inflation and slow but steady growth.

Christopher Decker, professor of economics, University of Nebraska Omaha

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