Interest rates won’t be falling anytime soon thanks to inaction by the Federal Reserve. Last week, Fed Chairman Jerome Powell announced that the federal body charged with regulating monetary policy would not cut interest rates.
Interest rates impact every American household every day. Interest is the cost for borrowing money through loans, credit, and other forms of debt. Car loans, home mortgages, personal loans, credit cards, and student loans are common forms of borrowing.
When interest rates are low, consumers are discouraged from borrow money to fund purchases, services, and activities. Increased economic activity can become inflationary.
To fight inflation, the Federal Reserve raised interest rates to freeze the home-buying market and slow borrowing after price increases hit a 40-year high in 2022.
Right now, interest rates are high. Inflation at 2.7% is far below the 9.1% rate that crushed households three years ago. Yet, the Fed has chosen once again to hold its federal funds rate, upon which other interest rates are based, in place. This is the fifth time in a row that the Fed halted interest rates after three back-to-back cuts last fall.
Holding interest rates steady is bad news for households.
Disagreement at the Fed
Among the group of Federal Reserve Governors, who all vote to determine whether to raise or lower rates, there wasn’t unanimity. For the first time in 30 years, two governors dissented, calling for rate cuts now.
Fed Governors Michelle Bowman and Christopher Waller on Friday released statements outlining why they supported an interest rate cut at this week’s meeting. The last time there was dissent was in 1993.
In statements, Bowan and Waller explained their no votes.
Bowan started:
Inflation has moved considerably closer to our target, after excluding temporary effects from tariffs, and the labor market remains near full employment.
For her, there are troubling signs that should nudge the Fed to take action:
With economic growth slowing this year and signs of a less dynamic labor market, I saw it as appropriate to begin gradually moving our moderately restrictive policy stance toward a neutral setting. In my view, this action would have proactively hedged against a further weakening in the economy and the risk of damage to the labor market.
Waller pushed back on the tariff-induced inflation bump being a long-term issue in his statement:
tariffs are one-off increases in the price level and do not cause inflation beyond a temporary increase. Standard central banking practice is to “look through” such price-level effects as long as inflation expectations are anchored, which they are.
Next, he must have had a crystal ball; his predictions about revisions in future labor data would indicate slower hiring than previously thought:
My final reason to favor a cut now is that while the labor market looks fine on the surface, once we account for expected data revisions, private-sector payroll growth is near stall speed, and other data suggest that the downside risks to the labor market have increased.” Within days of this statement, Waller was proven right when the July jobs report revealed that job growth in May and June were revised by 258,000 jobs.
The case is even stronger now than before for the Fed to cut interest rates during its next meeting in September.
If there’s a bright spot, it’s that mortgage and interest rates have been ticking down on their own because of concerns about slowdowns in the labor market. However, Americans needs relief in affording their consumer debt. We look to the next Fed meeting in September with anticipationt hat the Fed will finally cut rates again.