March’s sticky inflation report has thrown into question the timing of the Federal Reserve’s anticipated interest rate cuts. In fact, some have said Americans can’t rule out the Fed going in the opposite direction and hiking the rate instead.
The Federal Reserve penciled in three quarter-percentage point rate cuts in 2024, but that was before March’s report released during the week of April 7.
Consumer price inflation in March heated up to 3.5% from February’s 3.2% annual rate. While the Fed’s restrictive monetary policy has helped bring inflation down from its 9% peak in June 2022, inflation has been stuck between 3% to 4% for 10 straight months when the target rate is 2%.
The Fed has held the target range between 5.25% and 5.5% since July 2023. The rate reflects what banks charge each other in overnight lending but ripples to other types of consumer borrowing.
“I think we’re seeing in real time what it feels like to have an entire youth in a zero-interest rate environment and then have to adapt to having very high levels of debt in a high-interest rate environment,” Danielle DiMartino Booth, CEO of QI Research and former Federal Reserve adviser, said. “It’s not looking very pretty right now.”
The Philadelphia Fed said credit card delinquencies are the highest on record going back to 2012. U.S. credit card debt is at an all-time high and nearing the 2008 inflation-adjusted record. Meanwhile, the average 30-year fixed mortgage rate is around 7%.
While the number and timing of rate cuts is now in doubt, DiMartino Booth warns that current policy is already very restrictive and could tip into “policy error” territory.
“I think the mistake is not more so that we repeat a second wave of inflation, but rather an overly tight monetary policy exacerbates a weakening job market as well as household finances, which we’re seeing manifest in rising delinquency rates,” she said.
According to DiMartino Booth and QI Research data, non-discretionary inflation — spending necessities — is running at 4.7% year over year, while discretionary inflation — what people want to buy, not what they need — is running at just 0.7%.
“Households really don’t have a lot left over when they cover the costs of essentials, which are crippling, but not in the Fed’s control,” DiMartino Booth said. “We’re talking about gasoline prices, food prices, car insurance, homeowners insurance; these are things over which Federal Reserve policy has absolutely zero, zero, zero influence.”
Watch the interview above for DiMartino Booth’s take on when the Fed will cut rates and if this year’s election plays a role.