Unrelenting Inflation Halts Rate Cut Hopes

As inflation continues to trend back upward, hopes for an interest rate cut decline. High interest rates are grinding the economy to a halt. Fears of a ‘hard landing’ recession are increasing. Unable to break the grip of inflation, the slowing economy may fall into stagflation. The impact of which could be devastating to the country and individual retirement savers alike.

Economists originally projected several interest rate cuts this year. Neel Kashkari is the Minneapolis Fed President. He believes that there won’t be any rate cuts until 2025. The Fed wants to keep rates higher for longer to tame inflation.

The Cleveland Federal Reserve Bank published a study saying the Fed is unlikely to hit its 2% inflation target for at least three years. “There are both theoretical and empirical reasons to think that … the last half-mile could well take several years,” Cleveland Fed economist Randal Verbrugge wrote in the report.¹

They found that extrinsic causes of inflation like supply chain issues are largely resolved. Economists believe that this caused inflation to decrease at the start of the year. That decrease inspired optimism in rate cuts and caused the stock market to surge.

However, the Fed said intrinsic causes, like wage setting and price setting, are still pushing inflation up. The PCE price index measure of inflation rose from a year ago. Grocery prices are up more than 21% since 2021. Shelter costs are up more than 18% and energy is up 38%. ²

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Interest Rate Impact

Interest rates have been held at their highest levels since 2001. They have been between 5.25% to 5.5% since last July. Now, the Fed is questioning the impact of those hikes. Kashkari asked, “Where is the imprint of this tight monetary policy on the real economy? That’s what is harder to see.” ⁴

Core personal inflation is expected to remain far above the Fed’s 2% target. Because of this, Kashkari says he could see current rates “sitting here for an indefinite period of time.”

There are far ranging consequences to long-term high interest rates. Debt is becoming more expensive as delinquency rates surge. High rates slow growth. The Fed is also anticipating “big losses” in the commercial real estate sector as high rates make refinancing devalued offices prohibitive.

Warning from Wall Street

Jamie Dimon, CEO of JPMorgan, has said again that he fears stagflation may soon hit the economy and “the world’s just not ready for that.” He pointed to the government’s policy of the past few years – rampant government spending followed by record high interest rates. This policy could result in high unemployment and inflation combined with low demand. The resulting stagflation could hurt stocks, real estate, and further destabilize banks.

Dimon also said the out-of-control US debt is contributing to the problem. “I look at the amount of fiscal and monetary stimulus that has taken place over the last five years—it has been so extraordinary, how can you tell me it won’t lead to stagflation?”⁵

The signs of an economic slowdown are growing harder to ignore. Personal spending is declining. Consumption and disposable incomes both fell. Economists are saying savings cushions have been all but depleted. And the Chicago Business Barometer, a gauge of economic activity in the region, also fell from May from April. It was at its lowest since May 2020. In addition, GDP is now expected to grow only 1.2% instead of the original estimate of 2.7% a couple of weeks ago. ⁶

Conclusion

Inflation appeared to be on the decline at the beginning of the year. As a result, the stock market surged on optimism for multiple interest rate cuts this year. Now, inflation is back on the rise as upward pressures remain unresolved. With the prospect of hitting their 2% inflation goal looking years in the distance, the Fed is quashing any signals for cuts in 2024. Stagflation is becoming a real possibility. The consequences of which could be devastating to 401(k) and IRA funds. Americans looking to protect the value of their portfolios are discovering the benefits of physical gold in a tax-advantaged Gold IRA. Contact us today at 800-462-0071 to learn what it can do for you.

Notes:
1. https://www.foxbusiness.com/economy/inflation-take-years-fall-2-target-according-cleveland-fed-model
2. https://www.foxbusiness.com/economy/inflation-take-years-fall-2-target-according-cleveland-fed-model
3. https://images.wsj.net/im-953766?width=600
4. https://www.startribune.com/inflation-interest-rates-minneapolis-federal-reserve-neel-kashkari/600369183/
5. https://www.benzinga.com/analyst-ratings/analyst-color/24/05/39106372/jamie-dimon-says-worlds-just-not-ready-for-potential-stagflation-if-things-get-wors
6. https://www.wsj.com/economy/central-banking/the-fed-might-soon-have-to-worry-about-more-than-just-inflation-a31c1464