Curb your enthusiasm - interest rates not falling to pre-pandemic levels soon

Central banks believe cost pressures will remain elevated in high-income economies

- Ovais Subhani

A bigger-than-expected cut by the United States Federal Reserve may have given the impression that the interest rates on home and car loans here will rapidly fall to lows seen before the Covid-19 pandemic.

US policymakers and some private economists believe that the world's largest economy is in a new cycle, where low inflation, low growth and high unemployment are things of the past.

Relatively high interest rates will be a feature of this new cycle, and the rest of the world will have to adjust accordingly, analysts said.

Perhaps to underscore this remarkable phase the US economy is entering, the world's most influential central bank decided to kick-start it with a bang.

It reduced the target range of its key Fed funds rate (FFR) by 50 percentage points to 4.75 per cent to 5 per cent on Sept 18 - the first rate cut in two years. The move was larger than the 25-basis point cut most Wall Street banks were expecting.

The Fed plans to execute more cuts in 2024, 2025 and 2026, and has expressed confidence that inflation will continue to decline. It instead stressed the need for lower rates to buttress the labour market as unemployment rebounded in August to 4.2 per cent, up from 3.8 per cent in the same month of 2023.

The median of its own projections shows that the FFR will drop to 4.4 per cent by the end of 2024 and to 3.4 per cent by the close of 2025.

For 2026, the Fed's median FFR estimate is at 2.9 per cent. That rate is well above the range of 1.5 per cent to 1.75 per cent set by the Fed in October 2019 in its last meeting before it began emergency rate cuts in March 2020 amid the onset of the Covid-19 induced recession.