'We'll need to be patient'—the Fed is backing off on rate cuts

On Tuesday, the Fed kept interest rates unchanged at 5.25% to 5.5% for the sixth straight month in the face of persistently higher inflation than expected.

Although just a few months ago Fed chair Jerome Powell expressed confidence inflation was under control and rate cuts were still on the table, recent data has made the Fed chief reconsider his plan.

Powell believes the latest inflation readings, which came in higher than “anybody expected,” are a strong enough indicator that the Fed may need to back off on interest rate cuts for now.

"What that has told us is that we'll need to be patient and let restrictive policy do its work," he explained.

Inflation is still "sticky"

In April, wholesale prices—also known as PPI or what producers pay for their goods—rose 0.5% month over month.

The reading was higher than the more modest 0.3% increase the market had expected, but that didn't surprise Powell.

"I would say [the PPI reading was] actually quite mixed… You know, the headline numbers were higher, but they were backward revisions... I wouldn't call it hot,” said Powell on Tuesday.

The Core Producer Price Index, a measure that excludes energy and food, also rose 0.5% in April, above the expected 0.2% rise. Nevertheless, these numbers are rather "tentative" and the outlook may change once revisions come in.

For example, the core PPI in March was recently revised lower to a decrease of 0.1%, down from the initial numbers showing a 0.2% rise.

American hit from both ends

Remember when Treasury Secretary Janet Yellen called the initial pandemic inflation bump “transitory?” That was in 2021.

As of April 2024, the annual inflation in the U.S. stands at 3.4%. For perspective, this is 70% higher than the Fed’s target rate of 2%.

Until the central bank is assured prices are sufficiently softening, Powell stressed rates are likely to remain higher for longer.

In the meantime, Americans are facing a double whammy of growing prices and financing costs.

While the Fed is trying to tame inflation, Americans continue to pay prices that are rising faster than they historically have—all while contending with growing borrowing costs.

The latter is especially concerning, considering many studies that show Americans are increasingly turning to debt to make ends meet.

There are also other untinted consequences of higher borrowing costs—chief among them being a housing shortage caused by higher mortgage rates.

Despite moving towards what felt like a rate decrease, the average 30-year fixed-rate mortgage in the U.S. climbed above 7% last month, the highest level since November 2023.

As of the week ending May 10, 30, the long-term rate remains at 7.08%. For context, 30-year fixed-rate mortgages were below 3% as recently as 2021.