More than two years after the Federal Reserve began raising interest rates to curb growth and dampen inflation, businesses continue to hire, consumers continue to spend and policymakers wonder why their increases were not more aggressive.
The answer probably lies partly in a simple reality: High interest rates don’t bother Americans who own assets like homes and stocks as much as many economists would argue. expected.
Some people are clearly feeling the effects of Fed policy. Credit card rates have soared and rising delinquencies on auto loans suggest that people with lower incomes are suffering under their weight.
But for many people in middle- and upper-income groups – especially those who own their homes or took out cheap mortgages when rates were at their lowest – this is a rather economic moment. sunny. Their home values are largely holding up despite rising rates, stock indexes are near record highs, and they can earn meaningful interest on their savings for the first time in decades.
Because many Americans feel good about their personal financial situation, they have also continued to open their wallets for vacations, concert tickets, holiday gifts, and other goods and services. Consumption has remained surprisingly strong, even after two years of the Fed’s campaign to calm the economy. This means that the Fed’s interest rate moves, which always take time to implement, appear to be even slower to implement this time around.
“Overall, household finances still look pretty good, although some are hurting from high interest rates,” said Karen Dynan, a Harvard economist and former chief economist at the Treasury Department. “There are a lot of households in the middle and upper end of the distribution that still have plenty of money to spend.”
The Fed meets in Washington this week, giving officials another opportunity to debate the economy and plan for the future of interest rates. Policymakers are expected to leave rates unchanged and are not expected to release economic projections at this meeting. But Jerome H. Powell, the Fed Chairman, will give a news conference after the central bank releases its rate decision Wednesday afternoon, giving the Fed an opportunity to communicate how it understands the developments. recent inflation and growth.
Authorities raised interest rates to around 5.33%, up from near zero at the start of 2022. These higher central bank policy rates have cascaded through markets to drive up credit card rates and the cost auto loans, and helped boost 30-year mortgages. rate to around 7 percent, up from less than 3 percent just after the coronavirus pandemic began.
But the high rates haven’t affected everyone equally.
About 60 percent of homeowners with mortgages have rates below 4 percent, based on a Redfin analysis of government data. Indeed, many settled on low borrowing costs when the Fed cut rates to rock bottom during the 2008 recession or at the start of the 2020 pandemic. Many of these homeowners are avoiding moving.
This has combined with a moderation in housing construction, leading to a limited supply of homes for sale – meaning that while high interest rates have dampened demand, house prices have not only slightly faltered after a sharp rise during the pandemic. In major markets, house prices rose by around 46% compared to prices at the start of 2020. New house price data released on Tuesday showed a surprisingly strong recovery.
At the same time, stock prices have made a comeback since late 2023, partly because investors thought the Fed was done raising rates and partly because they felt optimistic about the long-term outlook businesses, with new technologies like artificial intelligence fueling hope. .
The result is that household wealth, which initially declined after the Fed’s first rate hikes in 2022, is now reaching new highs for people in the top half of the distribution. This happens when unemployment is very low and wage growth is strong, meaning people are earning more money each month to support their spending.
“Over the last year, we’ve been surprised” by the economy’s resilience, said Gennadiy Goldberg, rates strategist at TD Securities. The big question now, he said, is whether interest rates are simply too low to weigh on the U.S. economy or whether they are simply taking longer to pass through and result in slower growth. .
“It’s probably more the transmission side that’s changed a little bit,” Mr. Goldberg said.
Even with a strong economy, things don’t feel good for everyone. Delinquencies on credit cards and auto loans have increased, a clear sign that some households are feeling financial strain. Younger generations and residents of low-income areas appear to be driving this trend, according to the New York Fed’s analysis.
Katie Breslin, 39, has both benefited and suffered from interest rate policy in recent years. She and her sister bought a house in Manchester, Connecticut, when rates were near rock bottom. But she’s in graduate school and has both student loan and credit card debt, including a credit card whose interest rate was recently reset to 32 percent. This leaves him with less disposable income with each passing month, as more of his income goes toward interest payments.
Paying off the balance in full seems like a difficult task, and expenses that previously seemed reasonable, like an upcoming family trip to Ireland that she’s already paid for, seem like splurges.
“It seems almost irresponsible to continue now,” Ms. Breslin said of the trip. She used to order takeout every week, but now she does it once a month, if possible.
High rates have combined with rapid inflation to shake Americans’ confidence in the economy. But even though economic sentiment is lagging overall, many people report feeling good about their own financial situation. New York Fed survey data suggests that people at all income levels still expect their household income and spending to increase in the coming months, and that poorer people are slightly more optimistic than their wealthier counterparts.
Part of this could be due to another unusual aspect of this economic cycle. Although high interest rates typically increase unemployment, the resilience of the economy means that has not happened this time. Job openings have declined, but hiring has remained brisk and unemployment is very low.
As a result, low-income people, who are often the most vulnerable to job loss in a recession, continue to work and earn money.
The fact that many households are still managing to get by – and that some have been very sheltered from the effects of high rates – could help explain the resilience of the economy.
Central bankers initially ignored the economy’s surprising strength because inflation was falling anyway. At the start of the year, they forecast three rate cuts before the end of 2024, and investors expected those to begin by March.
But more recently, inflation has stalled at a rate above the Fed’s 2% target.
The stickiness of inflation is partly explained by the continued rise in service costs, which tend to respond to economic fundamentals such as rising wages. In short, some have suggested that more economic slowdown may be needed to further combat inflation.
That prompted many central bankers to suggest they would likely keep interest rates high for longer than expected. Investors initially expected the Fed to cut rates early this year, but now expect the first cut to come in September or later.
For now, most central bankers suggest the problem is that rates are slow to act – not that they are too low to slow the economy.
“Tight monetary policy continues to weigh on demand, particularly in interest-rate-sensitive spending categories,” Mr. Powell said in a speech this month.
For people waiting for credit card rate relief and wanting to get a foothold in the real estate market, that could mean a longer wait.
News Source : www.nytimes.com
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