More than two years after the Federal Reserve began raising interest rates to curb growth and curb inflation, businesses continue to hire, consumers continue to spend, and policymakers are wondering why. I doubt whether interest rates will be raised more aggressively.
The answer probably lies in a simple reality: High interest rates aren't really squeezing Americans who own assets like homes and stocks as much as many economists think. Be expected.
Some people feel oppressed by the Fed's policies. Credit card interest rates are soaring and car loan delinquencies are on the rise, suggesting lower income groups are struggling under the weight.
But for many middle- and upper-income people, especially those who own their homes outright or took out cheap mortgages when interest rates were rock-bottom, this is a pretty bright economic moment. Their home prices have largely held steady despite rising interest rates, stock indexes are hovering near record highs, and for the first time in decades they can earn meaningful interest on their savings.
Many Americans are satisfied with their financial situation, so they continue to open their wallets for vacations, concert tickets, holiday gifts, and other goods and services. Two years after the Federal Reserve began implementing measures to cool the economy, consumption remains surprisingly strong. And that means the Fed's interest rate moves, which always take time to materialize, are likely to take even longer this time.
“While some groups are feeling the pain of high interest rates, household finances generally still look pretty good,” said Karen Dynan, a Harvard University economist and former Treasury Department chief economist. “There are a lot of households in the middle and upper end of the distribution that still have a lot of spending money.”
The Federal Reserve will meet in Washington this week to give officials another chance to discuss the economy and plan future developments in interest rates. Policymakers are expected to keep interest rates on hold and are not scheduled to issue an economic outlook at this meeting. But Fed Chairman Jerome H. Powell is scheduled to hold a press conference Wednesday afternoon after the central bank announces its interest rate decisions, an opportunity for the Fed to communicate how it understands recent inflation and growth trends. .
Authorities have raised interest rates to about 5.33% from near zero at the beginning of 2022. The central bank's policy rate hikes trickle into the market, pushing up credit card rates and the cost of car loans, which is contributing to the rise in 30-year home loan prices. That rate has risen to about 7% from less than 3% just after the coronavirus pandemic began.
However, high interest rates do not affect everyone equally.
About 60% of homeowners with mortgages have interest rates below 4%, according to a Redfin analysis of government data. That's because many people locked in low borrowing costs when the Fed cut interest rates to rock-bottom levels during the 2008 recession and early in the 2020 pandemic. Many such homeowners avoid moving.
This, coupled with curbs on housing construction, has limited the supply of homes for sale. That means home prices, which rose sharply during the pandemic, have cooled only slightly, even as high interest rates have suppressed demand. Across major markets, home prices are still up about 45% from early 2020 prices.
At the same time, stock prices have rebounded since late 2023, as investors thought the Fed was done raising interest rates and as new technologies such as artificial intelligence sparked hope, the long-term outlook for companies remained uncertain. This was partly because he felt optimistic. .
As a result, household wealth, which initially fell after the Fed's first rate hike in 2022, is now at a new high for those in the top half of the distribution. This happens when unemployment is very low and wage growth is strong. That means people take in more money each month to keep up with their spending.
“We've been surprised by the resilience of the economy over the past year,” said Gennady Goldberg, interest rate strategist at TD Securities. He said the big question now is whether interest rates are simply too low and weighing on the U.S. economy, or whether they're simply taking longer to pass through and lead to slower growth. Ta.
“Probably what's changed a little bit is on the transmitter side,” Goldberg said.
Even if the economy is strong, that doesn't mean things are good for everyone. With credit card and car loan delinquencies on the rise, it's clear that some households are feeling financial stress. Younger generations and people in low-income areas appear to be driving this trend, according to an analysis by the New York Fed.
Katie Breslin, 39, has both benefited and suffered from interest rate policy in recent years. She and her sister bought a house in Manchester, Conn., when her interest rates were near rock bottom. However, she is attending graduate school and she has both student loan and credit card debt, of which the interest rate on one of her credit cards was recently reset to 32%. Therefore, her disposable income decreases each month as much of her income goes toward interest payments.
Paying off your balance in full feels like a reach, and expenses that once seemed reasonable, like an already paid family trip to Ireland, now feel like splurges.
“I feel like it's almost irresponsible to continue doing that right now,” Breslin said of the trip. She used to order takeout every week, but now she orders once a month.
High interest rates and rapid inflation have combined to undermine Americans' confidence in the economy. However, despite the overall lag in economic sentiment, many people report feeling okay about their financial situation. New York Fed survey data suggests that people across the income distribution still expect both household income and spending to increase in the coming months, and that the poor are slightly more optimistic than the wealthy. There is.
Some of that may be due to other unusual aspects of this business cycle. Higher interest rates usually increase unemployment, but the resilience of the economy meant that didn't happen this time. Although the number of job openings is down, hiring is still rapid and unemployment is very low.
As a result, low-income people, who are most vulnerable to unemployment during economic downturns, are still working and earning money.
The fact that many households are still operating, and some are highly insulated from the effects of high interest rates, may help explain the economy's resilience.
Central bankers initially dismissed the economy's surprising strength, saying inflation was falling anyway. Earlier this year, they predicted three rate cuts by the end of 2024, with investors expecting rate cuts to begin by March.
But recently, inflation has stalled above the Fed's 2% target.
Part of the persistence of inflation is due to continued rises in the cost of services, which tend to respond to economic fundamentals such as wage increases. This suggests that further economic cooling may be needed to further reduce inflation.
As a result, many central bank officials have expressed the view that interest rates are likely to remain high for a longer period of time than previously expected. Investors initially expected the Fed to cut interest rates early this year, but now expect the first rate cut to occur after September.
For now, most central bankers have suggested that the problem is that interest rates take time to take effect, not that they are too low to slow the economy.
“Tight monetary policy continues to weigh on demand, especially in interest rate-sensitive spending categories,” Powell said in a speech this month.
It could mean longer waits for people waiting for credit card interest rates to ease and get a foothold in the housing market.