By Alric Lindsay
On July 31, 2024, the chairperson of the United States Federal Reserve, Jerome Powell, announced that interest rates would remain the same, meaning they would stay “higher for longer.” This announcement surprised market stakeholders, as positive economic indicators during the quarter suggested that the Fed’s employment and inflation goals were moving into better balance. The Fed’s decision is significant because it not only impacts the US market but also affects Caymanians and other residents in the Cayman Islands, as local banks tend to align their interest rates with those set by the Fed.
Explanation of the positive economic indicators
Briefly speaking about economic indicators, Powell said:
In the labor market, supply and demand conditions have come into better balance.
Payroll job gains averaged 177,000 jobs per month in the second quarter, a solid pace, but below that seen in the first quarter.
The unemployment rate has moved up but remains low at 4.1%.
He added:
Recent indicators suggest that economic activity has continued to expand at a solid pace.
GDP growth moderated to 2.1% in the first half of the year, down from 3.1% last year.
He emphasized further that “Overall, a broad set of indicators suggest that conditions in the labour market have returned to about where they stood on the eve of the pandemic.”
Notwithstanding the positive indicators that could influence the Fed’s decisions to lower interest rates, Powell said that interest rates would remain as is i.e. higher for longer.
Effect of “higher for longer” interest rates on households
In announcing the Fed’s decision, Powell was mindful of the impacts of this approach on lower-income households.
He said: “My colleagues and I are acutely aware that high inflation imposes significant hardship as it erodes purchasing power, especially for those least able to meet the higher costs of essentials like food, housing, and transportation.”
Despite this acknowledgement, Powell maintained that the Fed’s monetary policy was based on long-term goals of promoting maximum employment and stable prices and “reducing policy restraint too soon or too much could result in a reversal of the progress we have seen on inflation.”
The Federal Reserve’s “higher for longer” interest rate decisions affect local banks in the Cayman Islands. As a result, individuals with variable-interest mortgages will continue to face high rates. Additionally, some people are unable to obtain new financing or abandon financing negotiations due to the high interest rates.
These high interest rates in the Cayman Islands, taken together with other high costs of living, are pushing some lower-income households further into financial hardship.
Solutions
To help lower-income households with hardship, it is noted that some foreign governments implement relief programs that provide food and electricity vouchers to lower-income households. However, these programs do not do much to improve the long-term economic situation of those households. This is in contrast to the millions of dollars in concessions and waivers given by governments to wealthy investors who, in turn, make hundreds of millions of dollars and significantly improve their long-term economic standing.
Instead of repeatedly doing the same thing with no long-term results for lower-income households, policymakers should find ways to achieve a better balance for all stakeholders, which must include avoiding the disproportionate impacts of policymaking on lower-income households.
For example, to address high interest rates, policymakers may consider legislating interest rate caps or giving the Cayman Islands Monetary Authority increased powers to do so.
To deal with the high cost of goods in stores, policymakers should explore ways to ensure that import duty waivers and concessions provided to large businesses translate into lower prices for consumers. Alternatively, policymakers should also consider how they can support the establishment of new businesses owned by Caymanians, which can compete with existing service providers. This competition could lead to more competitive or lower prices for consumers.
In addition to the above, it is essential to establish a robust consumer protection system to protect consumers’ rights, particularly in cases of price gouging.
Finally, it’s important for Cayman to have a fair labour market so that qualified Caymanians have equal opportunities for new jobs and promotions. Without proper laws and enforcement, some Caymanians may face barriers to finding work and advancing in their careers, which could lead to them needing government assistance.
If policymakers don’t take action to improve the labour market, as well as address interest rates, the cost of living, and housing prices, many people, especially Caymanians, will continue to face hardship. These difficult times may persist and affect future generations.
Note to readers: While the United States Federal Reserve continues to maintain interest rates “higher for longer,” the Fed may consider a rate decrease in September if it continues to receive good economic data. It is hoped that any such rate decrease would be passed on to consumers in Cayman.
