It’s unfair to always pick on broccoli because it is healthy and (with copious amounts of cheese) also delicious, but for the sake of the example, please let it slide this time.
Say that we have all been promised dessert (interest rate cuts) if we finish that pesky broccoli (inflation), and we begin really, really looking forward to dessert. So much so that we get caught up thinking about dessert and when it will be served (pricing it into market) that we kind of forget the part about the broccoli-finishing (stop spending so much) and act all surprised and disappointed when the dessert gets postponed because there is still broccoli on our plate as if we had no part in not finishing it.
And to completely ruin the simile, be aware that broccoli (inflation) is not weather*; broccoli (inflation) is 100% human-made and affected. The broccoli is ours to eat, however unpleasant it might be.
(*Climate, however, is highly impacted by humans.)
In other words: because of the unexpectedly meh inflation numbers for March (3.5%), the much-anticipated interest rate cuts have most likely moved out to at least September, if even then.
Over the weekend, Bloomberg brought a deep dive into where—most places—and when—this fall—central bank rates will be cut which included this map:
On the other side of the microphone, however, the US Federal Reserve and peers keep emphasizing that rate cuts still have to be earned. That the market already took them into account does not make them automatically happen.
The discomfort of inflation and high(er) rates is starting to veer into pain. The cash reserves amassed during the pandemic are pretty much depleted, credit card spending is up, mortgage originations have not caught up to previous levels, and commercial real estate is still in a tailspin, all catching up sharply in the banks’ net charge-offs. That is just looking at the largest banks that released first quarter earnings this week. The coming weeks are expected to show an even bleaker picture at the regional banks.
Speaking of mortgages, the average rate is now close to 7%, again, which together with the overall inflationary strain keeps the residential housing market subdued. In addition, WSJ pointed out in a piece this week, non-mortgage costs such as property taxes, homeowners’ insurance, utility costs, and HOA fees now make up more than half of the overall housing costs.
Insurance premiums, especially, have gone up because of big payouts for floods, storms, wildfires, and other natural disasters in 2023. All of this has pushed housing affordability to its lowest point since 1985.
And the US as a nation has been running up the credit card, too, which is not exactly helping. This week, the International Monetary Fund (IMF) pointed out that in 2023 government spending exceeded revenue to the tune of 8.8% of GDP which was more than double the year before.
So, the government funds the budget deficit by issuing treasury bonds. The debt pays monthly interest rates back to the investors, and both the outstanding debt ($35 trillion) and the interest rate paid is way higher than before. That means—directly and indirectly—more cash in the pockets of people, who then uses it to buy groceries, gas, and pay rent. And we’re back to broccoli.
It used to be conventional wisdom that the lift from debt payments was far less than the economic contraction from higher rates, and that was why interest rate hikes could be used to curb inflation.
The IMF warns that that transmission mechanism will not work (as well) when the debt is as big as it is now, and as reported by Bloomberg, some will even entertain the fringe notion that interest rate hikes can fuel growth—and thus inflation—rather than dampen it.
Regitze Ladekarl, FRM, is FRG’s Director of Company Intelligence. She has 25-plus years of experience where finance meets technology.