Stocks soared on Friday following the strongest signal yet that US the Federal Reserve is gearing up to start cutting interest rates again this fall. But how long can this celebration last?
Related: Fed chair Jerome Powell signals interest rate cuts amid Trump attacks
While Wall Street cheered the biggest headline from the speech by the Fed chair, Jerome Powell, at the annual Jackson Hole symposium in Wyoming, Powell also delivered a reality check on where interest rates could settle in the longer term.
"We cannot say for certain where rates will settle out over the longer run, but their neutral level may now be higher than during the 2010s," said Powell.
In other words: even if the Fed does start cutting interest rates again this year, they may not fall back to their pre-pandemic levels. It's a signal, despite the short-term optimism on potential rate cuts, that the Fed's long-term outlook is more unstable.
"Markets might be ahead of their skis on how aggressive the Fed is going to be in reducing interest rates, because the neutral rate might be higher than some believe," Ryan Sweet, an economist at Oxford Economics, said.
Higher rates means borrowing money for loans, such as mortgages, will be more expensive. The average 30-year fixed mortgage rate was just under 3% in 2021, when interest rates were near zero.
Now the average mortgage rate is closer to 6.7%. Paired with home prices at near-record highs, elevated mortgages mean many Americans will continue to struggle to purchase a home.
Although Trump has been pushing the Fed for months to decrease rates to 1%, claiming that Powell is "hurting the housing industry very badly", it seems unlikely that rates will return to such a level any time soon.
The Fed is trying to achieve a Goldilocks balance. Rates that are too high risk unemployment, while rates that are too low could mean higher inflation. Policymakers are searching for a "neutral" level, where everything is just right.
Many economists believed the central bank was close to achieving this balance before Trump started his second term. In summer 2022, as inflation scaled its highest levels in a generation, the Fed started raising rates, at the risk of hurting the labor market, in an attempt to get inflation down to 2%.
Rates rose to about 5.3% in less than two years, but the jobs market remained strong. Unemployment was still at historically low even as inflation came down. Although some economists had feared rapidly increasing rates would throw the US economy into a recession, instead the Fed appeared to achieve what is known as a "soft landing".