Consumers want a break on prices and interest rates but Fed keeps rates high

The bad vibe that many, but not all, consumers feel about the U.S. economy could ease up a bit when the Fed finally takes its foot off the brakes. But, once again in 2024, we're stuck waiting for that first interest rate cut.

On Wednesday, the Federal Reserve announced that rates would stay the same. In its statement, the Federal Open Market Committee said it "does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2%."

Economic activity has continued to expand at a "solid pace," according to the Fed statement. "Job gains have remained strong, and the unemployment rate has remained low."

While inflation has eased over the past year, according to the Fed, inflation "remains elevated."

Just three months ago, many thought the first rate cut would show up at the Fed's June meeting. But since then, the Fed has continued to express concerns about elevated inflation and the "lack of further progress" toward reaching the Fed's 2% inflation goal.

Right now, Mark Zandi, chief economist for Moody's, said he'd expect the Fed to still cut rates in 2024, possibly a quarter point in September and another quarter point in December. If the Fed skips a rate cut in September, Zandi is expecting a rate cut to be announced Dec. 18 after the Fed's scheduled two-day meeting.

After that, he said, the Fed is likely to keep cutting rates gradually until the federal funds rate returns to 3% by the end of 2026. The federal funds rate currently remains within a target range of 5.25% to 5.5% — which is where short-term rates have been since late July 2023. One has to go back to late January 2001 — or more than 23 years — to see the federal funds target as high as 5.5%.

The interest rates consumers pay skyrocketed

Most people couldn't rattle off the short-term Fed rate. But they're riveted to other rates that hit their wallets.

Many could tell about a nearly 30% or 35% on one of their store-branded credit cards. The average rate for all credit cards is now 20.68%, according to Bankrate.com data. By contrast, the average rate for all credit cards was 16.3% in at the start of 2022, before the Federal Reserve began raising interest rates.

Others might remember that mortgage rates hit nearly 7.8% in October, now down to an average 6.99% for the 30-year fixed rate mortgage, based on U.S. weekly average data issued June 6 by Freddie Mac.

The "vibe" if you're trying to borrow — or hoping to refinance your mortgage — is abysmal.

Sure, we have seen some phenomenal high points in recent weeks — such as the Dow Jones Industrial Average closing at a record 40,003.59 points on May 17 and General Motors closed at $48.21 a share on June 11, up nearly 31.5% from its close of $36.67 on June 12, 2023.

Even so, many consumers grumble about $10 fast food trips that they swear cost $5 once, scorching interest rates, and their fears that jobs could be lost as technology marches on. We're hearing a ton of unhappy talk about what everybody paid for everything, such as a fun, but not extravagant night, where $50 was spent on burgers and beers.

Michael Greiner, assistant professor of management at the Oakland University School of Business Administration, said many consumers continue to deal with the aftershock of skyrocketing inflation in 2022 and a sense of losing economic control after the COVID-19 pandemic hit in 2020.

The U.S. unemployment rate hit 14.7% in April 2020 during the start of the pandemic. The economy regained its footing somewhat but the jobless rate was still 6.8% in October 2020.

Consumer prices falling in some areas, especially airfares and used cars

Consumer prices skyrocketed after supply chain disruptions and labor shortages hit during the pandemic. The latest inflationary bout spiked two years ago when consumer prices rose year-over-year by 9.1% in June 2022, according to the Consumer Price Index for all urban consumers.

Inflation has cooled considerably since then but the Fed is continuing its inflation fight.

The consumer price index rose by 3.4% over the last 12 months ending in April. And the CPI increased by 3.3% year over year through May, according to the U.S. Bureau of Labor Statistics on Wednesday.

On a month-to-month basis, though, inflation was unchanged in May after rising 0.3% in April.

Prices fell slightly month-to-month in several categories in May, including dairy products, nonalcoholic beverages, apparel, and new vehicles.

New car and truck prices fell 0.5% month-to-month in May, and fell 0.8% year-over-year in May, according to the latest federal inflation data.

Used car and truck prices fell 9.3% over the 12 months through May, but were up 0.6% month-to-month in May. Used car and truck prices fell 1.4% month-to-month in April.

Airfares were down 5.9% over the 12 months through May and fell 3.6% month-to-month in May.

Many economists and consumers don't see eye to eye

Much economic angst — which came to the surface and saw even more light after the pandemic — remains top of mind for many families, including the high cost of child care; the great disparity in wealth; the inability to get ahead for many in the middle class, including those with and without college degrees.

Oakland University's Greiner said economists can review the current economic data, including the low jobless rate, and say things are doing great in 2024. But that's not how many households feel.

"Most people aren't looking at the figures the same way economists are," Greiner said.

Many consumers, he said, got used to relatively small price hikes for many years and somehow believed that 3% should be considered to be high inflation, even though 3% inflation has been historically viewed as relatively mild.

Some historical context: Inflation in the United States was at 11% in 1974, 13.5% in 1980, nearly 5.4% in 1990, nearly 3.4% in 2000 and 3.8% in 2008. And inflation was 2.44% in 2018, according to data from the Federal Reserve Bank of St. Louis. Inflation hit 8% in 2022.

Where was inflation in 2023? Some, wrongly imagine that it was just as bad or worse than when inflation spiked out of control in 2022. But inflation dropped and hit nearly 4.13% in 2023.

Unfortunately, many consumers banked on extraordinarily low inflation for years. Inflation was roughly 2.1% or lower from 2012 through 2020, with the exception of a bump a bit beyond 2.4% in 2018.

Most of us have no idea what we paid for a chicken sandwich at the drive thru or for a dress five years ago, but suddenly it seems like everything costs double or triple what we remember, even if it isn't.

No doubt, we are paying much more for many goods and services than we did before the pandemic. But, let's also remember that many consumers kept buying many items because we had the extra money from wage gains or savings or stimulus checks sent during the pandemic.

"When companies were raising prices, people were willing to pay it," Greiner said.

Now, many went through that savings. Many are paying more money toward their debt, given the higher interest rates. And retailers and restaurant chains are feeling more pressure to promote price cuts.

Target, for example, announced in May that it would reduce prices on "5,000 frequently shopped items." The big brand retailer listed price cuts in its news release on "milk, meat, bread, soda, fresh fruit and vegetables, snacks, yogurt, peanut butter, coffee, diapers, paper towels, pet food and more."

The 16-count package of Huggies Baby Wipes was dropping to 99 cents, instead of $1.19.

If Target recognizes that consumers are feeling squeezed, you'd hope that the Fed could realize the same, and soon.

The Fed won't slash interest rates immediately. It's going to feel like the small savings on those baby wipes.

We're not heading toward a repeat of a 30-year mortgage rate below 3% as we saw in 2021, according to Freddie Mac data. But, over time, analysts say consumers could see mortgage rates edge closer to the 5.34% average for a 30-year mortgage in 2022. It might be a welcome sight for many borrowers.

"The Fed could help with the 'vibecession' if they were to start cutting rates," Zandi acknowledged.

Consumers might feel better about their own finances, if the cost of borrowing wasn't so terribly high.

Borrowers would practically immediately start seeing lower interest rates on credit cards and consumer finance loans, as the Fed cut rates over several months. And, Zandi said, auto loan rates and mortgage rates, which are not as directly influenced by the short-term federal funds rate, would likely edge down more as well.

Zandi said he expects that 30-year fixed mortgage rates ultimately would settle in between a 5.5% to 6% range once the Fed cuts rates. But he said it could take until early 2026 for the 30-year fixed average to fall below 6%.

"They will only go lower in a recession," Zandi said.

"The lower rates would be especially helpful for lower income households who are struggling the most financially and who are the most pessimistic," Zandi said.

Rossman, of Bankrate.com, noted that mortgage rates tend to move in advance of Fed actions because they more closely track 10-year Treasuries, which reflect investor expectations.

"Our latest economist survey predicted a 10-year Treasury yield of 3.8% next March," Rossman said. "That would probably mean an average 30-year fixed mortgage rate around 6.4%" next spring. And mortgage rates might fall further toward the high 5% range, closer to 6% than 5%, later in the second half of next year.

"All of this is written in pencil, of course," Rossman added.

In general, he said, most analysts expect that mortgage rates could be "higher for longer."

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We've not even seen the first rate cut yet.

The Fed remains hyper-focused on inflation, which is above its 2% target. The Fed is keeping its eye on the core personal consumption expenditure's index, excluding food and energy, that remained at 2.8% in February, March, and April.

The Fed, Zandi said, wants more evidence that inflation is headed back to target in the coming months. That should happen by September, he said. Inflation continues to slowly, but steadily moderate, he said.

"The job market and economy are strong, as evidenced by the strong job growth," Zandi said. "But it is cooling off, as unemployment has notched higher — hiring and quit rates are down."

"The household employment numbers are soft because they are not picking up the surge in immigration, which adding significantly to population, labor force and employment," Zandi said.

It's great to be working, of course, and be able to get a raise. Even so, consumers want to see more retailers and restaurants get a reality check. Launching a limited $5 value meal during the summer, as some fast food chains are doing, is OK. But shoppers want substantive savings.

The Fed might be fighting inflation, but many consumers are arguing at home over which bills they can afford to pay this month — and what they can't afford to buy.

The Fed can get rid of some bad vibes by beginning to roll back interest rates in 2024 now that inflation isn't anywhere close to 8% or 9%.

Contact personal finance columnist Susan Tompor: stompor@freepress.com. Follow her on X (Twitter) @tompor.