Two major Fed officers argued last week in favor of cutting rates. Former New York Fed President Bill Dudley said in a Bloomberg Opinion piece, “I Changed My Mind. The Fed Needs to Cut Rates Now,” saying, “The facts have changed, so I’ve changed my mind. The Fed should cut, preferably at next week’s policymaking (FOMC) meeting.” And the current Chicago Fed President Austan Goolsbee added the latest inflation statistics make him confident the Fed can cut rates now, saying, “You only want to stay this restrictive for as long as you have to and this doesn’t look like an overheating economy to me.” He also argued, as I have been saying, that consumer debts are rising, which also argues for rate cuts sooner rather than later. Unfortunately, the Fed once again did not cut rates, but indicated they might in September.
Here are some of the costs of high interest rates, which the Fed can relieve by cutting rates:
· Median home prices reached $426,900 in June, up 4.1% in the past 12 months. Rising prices plus high mortgage rates tend to limit sales, so existing home sales declined 5.4% in June. There were 1.32 million homes for sale at the end of June, up 23.4% in the past year. Single-family home sales are running at a super-low 617,000 annual pace and the inventory of unsold new homes is up to 476,000, a 9.3-month inventory at today’s sales pace – the largest inventory since 2008
· Interest on credit card debt has doubled in the past two years. The combination of higher rates (21.2% at end-2023 vs. 14.5% in 2021) and higher debt levels ($1.13 trillion at end-2023 vs. $775 billion in 2021) yields $236 billion in annual credit card interest now vs. $112 billion in 2021. That has more than doubled over the past two years. The Philadelphia Fed reported last Thursday that 60-day past due credit card balances rose to 2.6%, up from a low of 1.1% back in 2021. The 30- and 90-day past due amounts are at their highest level since 2012, at 3.56% and 1.89%, respectively.
· Cox Automotive reported that vehicle repossessions are up 23% over last year. High interest rates make for higher monthly payments and also suppress both new and used vehicle sales.
· U.S. federal debt is near $35 trillion. At 5% interest rates, that’s $1.75 trillion per year to service that debt. A reduction of just 1%, to 4%, reduces the U.S. debt service costs by $350 billion.
· Office buildings are emptying out in many cities. At the end of 2023, national vacancies rose to 19.6%, the highest rate since these numbers began to be tracked in 1979. The worst markets are in San Francisco, with a 36% vacancy rate, followed by Denver at 31% and Seattle at 28%.
· Nationwide, rents for houses and apartments rose 30% between 2020 and 2023, according to the Zillow Observed Rent Index. This is causing rising evictions.
· The Wall Street Journal, using data from the Eviction Lab at Princeton University reported eviction filings in six major cities are up 35% or more (vs. pre-2020 norms) in the past year. In Phoenix, landlords filed more than 8,000 eviction notices in January alone, the most ever in the Arizona capital in a single month.
That’s why I keep arguing that the Fed needs to cut rates. High interest rates cause suffering for many people AND contribute to inflation. In three-and-a-half years, this is where the Biden-Harris administration has gotten us. President Joe Biden proclaimed last week that he has “cured the economy.” I hope the Biden-Harris administration will stop playing doctor and are done curing the economy.
