‘Sticky’ inflation signals delay in interest rate cuts

Bill Jones: Many potential homebuyers are sitting on the sidelines amid high interest rates

Darren Page isn't expected the Fed to cut rates for several more months.

• 
• 

The latest U.S. consumer inflation figures increased 3.5% last month from a year ago, the highest level since September 2023, which has federal officials saying the first of several interest rate cuts previously expected in 2024 is unlikely to happen this summer.

Federal Reserve Chair Jerome Powell said at an April 16 policy forum in Washington, D.C., that the latest consumer price index has not given the Fed confidence that inflation is fully under control, according to media reports.

“If higher inflation does persist, we can maintain the current level of (interest rates) for as long as needed,” he said.

At its most recent meeting in March, the Fed kept interest rates unchanged but had held onto an outlook for three cuts in borrowing costs this year. The first was widely expected in June. The federal funds target rate has remained at 5.25% to 5.5% since last summer, following 11 rate increases that began in March 2022.

Indexes which increased in March include motor vehicle insurance, medical care, apparel, personal care and shelter, which includes rent and lodging away from home, according to U.S. Bureau of Labor Statistics data. The closely watched consumer core price index, which excludes the more volatile food and energy categories, rose 0.4%, marking the third straight month of increase.

The banking industry is among those that have closely monitored inflation data in the hopes that interest rate cuts are around the corner. Bill Jones, president and CEO of Branson Bank, said he wasn’t surprised but a little disappointed by the March consumer inflation figures.

“We would like to see things level off and head toward the Fed’s target of 2%. At 2%, they’ve reached their price stability mandate,” he said. “Perhaps if a trend can be established to support that lower inflationary level, then they’ll begin to cut rates. But that just hasn’t happened.”

Jones characterized the current inflation level as “very sticky and stubborn.”

“The consensus of the markets is certainly less rate cuts in ’24. And many are suggesting that we may not see any,” Jones said. “There certainly seems to be support for this higher-for-longer level of rates in the system at this point.”

Positive signs
However, there are still positive economic factors that federal officials point to as a reason to delay interest rate cuts. The U.S. unemployment rate in March dipped to 3.8% from 3.9% a month prior, as employers added more than 300,000 jobs. In Missouri, the unemployment rate is even lower at 3.3%, according to Missouri Economic Research and Information Center data. The state’s nonfarm payroll employment increased by 8,100 jobs last month, and its unemployment rate has been at or below the national rate for more than eight years.

The most recent data from the BLS reported the Springfield metropolitan statistical area – which comprises Greene, Christian, Dallas, Polk and Webster counties – had a February jobless rate of 3.3%, on par with the state level.

Darren Page, associate professor of economics at Drury University, said there are no economic signs pointing to a recession when looking at the current U.S. unemployment rate and last year’s real gross domestic product growth. Real GDP growth in the fourth quarter of 2023 increased at an annual rate of 3.4%, according to U.S. Bureau of Economic Analysis data. The fourth-quarter increase primarily reflected increases in consumer spending, federal, state and local government spending, nonresidential and residential fixed investments and exports. First-quarter data for this year is expected to be released by month’s end.

“It’s a bit higher, but still it’s not alarming,” Page said of the national unemployment rate, when compared to 3.5% in March 2023. “In terms of recession, there’s nothing clearly indicating that that’s a concern, either. That seems to be perhaps a consensus from the Federal Reserve, given we’ve had the same interest rates since August 2023.”

As the state and U.S. unemployment rates remain relatively low and jobs are being added to the labor force, Page said work opportunities for those seeking them remain prevalent.

“In terms of total jobs, given an unemployment rate that’s not super high and given an increasing labor force, this would suggest a strong labor market within Springfield and that there are a lot of opportunities here,” he said.

Despite elevated inflation, retail sales continue to show strength, increasing in March by 0.7%. It marked a second consecutive month of higher consumer spending for retail, as it rose 0.9% in February, according to U.S. Commerce Department data.

With the continuation of some positive economic signs, Page said the desire to see interest rates cut right now depends on who you ask.

“If you’re asking somebody who’s looking to buy a home, they would say, ‘Well, that rate’s not so good,’” he said.

Housing needs
Real estate inventory continues to remain low, which is a challenge on the mortgage side of Branson Bank operations, Jones said.

Officials with the Greater Springfield Board of Realtors said in March the most recent Southern Missouri Regional MLS data indicated the Springfield metropolitan area had about a month and a half of active housing inventory. The total increased to just under three months when factoring in active and pending sales.

Jones said one reason is that those who might typically be in the market for a new house are currently sitting on the sidelines.

“Folks are just not willing to trade out of that 3.5% mortgage that they secured a few years ago. For a [$300,000] mortgage loan at 3.5% that might’ve been secured, let’s say five years ago or somewhere in that range, the 30-year monthly payment would be $1,347,” he said, noting a 30-year loan for 7.5% – near the level of a current 30-year fixed mortgage rate – increases the payment to $2,098. “It’s a difference of $751. That is over a 50% increase in the amount of the monthly payment.”

Rent also continues to contribute to elevated inflation rates. Brent Brown, board president of the Springfield Apartment & Housing Association, said via email while the economy has shown signs of improvement, “market conditions remain extremely hard to predict, to say the least.”

Citing ALN Apartment Data, a nationwide multifamily data provider, Brown said rent in Springfield was up 4% in 2023 from a year prior.

The U.S. Department of Housing and Urban Development put fair market rent prices in Greene County at $921 for a two-bedroom apartment in fiscal 2024, up from $871 in fiscal 2023.

“The cost of housing, like the cost of anything, increases when the cost of business goes up,” Brown said. “We are seeing significant increases in about every expense category in the apartment business.”

Line items like payroll, property taxes, insurance, utilities and maintenance or repairs have seen double-digit increases in the past 12 months, he said. Once the inflation levels off and the Fed starts reducing the interest rate, Brown said pricing pressure in those areas should receive relief.

However, while the Fed is next scheduled to meet April 30-May 1, Page isn’t expecting a rate cut announcement to be a part of the proceedings.

“I would say that there will not be any, at least in the next few months, given that there’s no signs in the inflation data that we’ve kind of weathered the storm just yet,” he said.