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Relief could be a long time coming for businesses and households feeling the squeeze of today’s high interest rates, going by the remarks of one Federal Reserve official Tuesday.
Key Takeaways
- The Federal Reserve is "a long way" from cutting its key interest rate, said Neel Kashkari, a member of the central bank's policy committee.
- The Fed has raised its fed funds rate to the highest since 2001 and may keep it there to make sure inflation is thoroughly subdued.
- Individual borrowers and businesses have felt the pain of the Fed's rate hikes, which have forced interest rates on all kinds of loans higher.
The Fed could keep its benchmark interest rate at least at its current level—the highest since 2001—through the end of the year and beyond, said Neel Kashkari, president of the Federal Reserve Bank of Minneapolis and a member of the central bank committee that sets the nation’s monetary policy.
“I think we're a long way away from cutting rates,” Kashkari said in a Q&A session at a conference in Minneapolis.
The Fed has raised its interest rate 11 times since March 2022, boosting it from near-zero to a range of 5.25% to 5.5% in an effort to cool down the scorching inflation that set in as the economy recovered from the pandemic.
The rate hikes have added friction to the economy in several ways, putting upward pressure on credit cards, mortgages, and other consumer loans. High interest rates have also made business harder for banks, which have grown more reluctant to lend money.
Both of those factors have dragged down the ability of consumers to buy things, and of businesses to hire and expand, raising fears of an impending recession. To the surprise of many economists, however, unemployment has stayed low and a severe slowdown has yet to materialize, while inflation has simmered down.
The Consumer Price Index had risen 3.2% over the year as of July, far less than the 9.1% inflation rate of June 2022 though still above the 2% goal that the Fed is aiming for.
At some point, the Fed will shift out of inflation-fighting mode and begin to lower interest rates again, though that day could be a long way off.
“That could happen sometime next year,” Kashkari said. “Or the year after that, but we need to see how the data come in.”
Traders are betting that the Fed won’t raise its rate any more, and will begin to cut it next May, according to the CME Group’s FedWatch tool, which forecasts Fed rate hikes based on fed futures trading data.
Kashkari noted that while inflation has come down considerably, some measures of consumer prices closely watched by policymakers are still too high for comfort. PCE inflation—the Fed’s preferred inflation gauge—was running at around 4% after excluding the volatile food and energy prices that tend to make the overall inflation reading fluctuate from month-to-month.
“It's still around twice of what our target is,” Kashkari said. “We need to be reasonably confident that it’s all the way going back down to 2%.”