The U.S. economy appears to be heading in a direction that will make it difficult for Americans to get long-awaited relief from high interest rates.
That scenario is known as a "no-landing," in which the economy continues to grow but in a way that reignites inflation and hampers the Fed's ability to cut rates. The failure to reduce borrowing costs will affect everyone: shoppers seeking lower prices, borrowers seeking better rates and homebuyers expecting more attractive mortgage terms.
A slew of data released so far supports the view that the U.S. economy may not be on the verge of a landing.
The latest data was Thursday's inflation report, which showed the CPI rose 2.4% year-on-year in September, slowing from the previous month but above expectations for a 2.3% increase.
This followed the September nonfarm payrolls report, which beat expectations, with the U.S. adding 254,000 jobs that month and the unemployment rate falling to 4.1%. Meanwhile, job growth in July and August was also revised upward.
The data suggest that after years of high interest rates, the U.S. economy has not weakened substantially and the Federal Reserve may not need to ease monetary policy as much as previously expected.
This week, Ed Yardeni, president of Yardeni Research, said he doesn’t see the Fed cutting rates any more for the rest of the year. “The strong September jobs report and upward revisions to July and August kill the hard landing scenario,” Yardeni said in a note to clients this week.
As the "no landing scenario" is increasingly priced into the bond market, with the 10-year Treasury yield breaking through 4% for the first time this week, it is affecting a key area of the economy - housing.
Since the Fed's aggressive rate cuts, 30-year mortgage rates have been climbing, not falling. How further rate cuts will affect mortgage costs is uncertain, and will depend on how the bond market reacts to future data.
There is also a secondary risk - as the economy re-accelerates, inflation could become a problem again, cementing the prospect of long-term higher interest rates that many had abandoned after the Fed's sharp rate cut last month. "Stronger job growth could lead to higher prices, which would further complicate the Fed's work," said Megan Horneman, chief investment officer at Verdence Capital Advisors, on Monday. "We think the jobs report rules out another 50 basis point rate cut at the November meeting."
Steven Blitz, chief U.S. economist at TS Lombard, expressed similar views in a report on Tuesday. He said:
“The Fed won’t cut the fed funds rate to 3%, but the final rate for this round will end up being too low and will stay there for too long. Inflation then rebounds and the Fed raises rates again sooner than anyone expects. The risk of this bad outcome coming sooner than expected is that the biggest risk in the Fed’s rate cuts and aggressive guidance is the one that markets are not pricing in — that the U.S. economy doesn’t land at all.”
That's unwelcome news for U.S. consumers who have been hoping for relief from high borrowing costs over the past two years.
According to the Federal Reserve, commercial bank credit card loan rates rose to 21.7% in August, the highest rate recorded in at least the past 20 years. The 48-month new car loan rate also rose to 8.6% in August, the highest level in more than a decade.
Consumer mortgage originations by large banks also fell sharply to $44 billion in the second quarter, well below the 2021 peak of $212 billion, according to the Philadelphia Fed.
“Most potential borrowers haven’t felt the pinch of lower borrowing costs thanks to lower benchmark interest rates,” said Mark Hamrick, senior economist at Bankrate.com. “It remains a struggle for many Americans to finance and pay for large purchases, whether it’s a home, a car or other household items that might be paid for with a credit card.”
The article is forwarded from: Jinshi Data
