Since raising interest rates to their highest level in more than two decades, the Federal Reserve has succeeded in easing the overheating of the U.S. economy. But rising borrowing costs have also had some unintended consequences.
High-income households are benefiting from the stock market boom and rising home prices. Businesses are borrowing money at a rapid pace, while consumers continue to spend.
But elsewhere, a year of high interest rates is finally starting to take its toll. Americans are taking longer to look for work, and unemployment has risen. Small businesses are feeling the pain of rising loan costs. Low-income families are falling behind on car loans and credit card payments.
“Things have eased somewhat over the past few months, and Fed officials would be very concerned if the slowdown started to accelerate,” said Veronica Clark, an economist at Citigroup. She added that would lead officials to move faster Lower interest rates.
Policymakers are widely expected to keep interest rates steady when they meet next week, but investors expect the Fed to begin lowering borrowing costs in September. Until then, assessing the impact (or not) of the Fed’s policies on the economy will help guide officials in curbing inflation without damaging the job market.
real estate market
The impact of rising interest rates on the U.S. real estate market is most obvious. The Federal Reserve’s policies not only stimulated a surge in borrowing costs, but also caused housing prices to rise. Measures of housing affordability are near their lowest levels in more than three decades of data.
With mortgage rates hovering around 7%, monthly mortgage payments for those buying a median-priced home climbed to $2,291 in May from $1,205 three years ago, according to the National Association of Realtors.
Economists expected sales to fall as borrowing costs rose — and they did. “It’s surprising how powerful the lockdown effects would have been had the economy not been in recession,” said Ralph McLaughlin, senior economist at Realtor.com.
Existing homeowners who secured ultra-low mortgage rates during the pandemic remain reluctant to put their properties on the market. This makes an already limited supply of homes even more limited and pushes home prices to new highs.
stock craze
Higher interest rates typically act as an anchor for the stock market by slowing business investment and growth. But investors have largely shrugged off those concerns, allowing stock prices and Americans’ retirement accounts to soar to new levels.
Since the Federal Reserve began raising interest rates in March 2022, the S&P 500 has risen about 25%, adding about $3 trillion to household wealth.
However, Mark Zandi, chief economist at Moody’s Analytics, said that if the Fed does not start cutting interest rates soon, “the market will become fragile.” “Investor expectations for a rate cut are already priced in current stock prices.”
Talent Market
Despite high interest rates, the U.S. job market has repeatedly run counter to expectations of an economic slowdown and is finally showing signs of cooling.
The pace of hiring has slowed from the overheated pace of two years ago, and companies are posting fewer job openings. Fewer employed Americans are quitting their jobs, and unemployed people are finding it increasingly difficult to find work.
The number of people unemployed for 27 weeks or more, known as long-term unemployment, rose to 1.5 million in June, the most since 2017, excluding a temporary surge during the pandemic, Aaron Terrazas said . Chief Economist at Glassdoor.
Hiring has become more concentrated in a handful of industries, including health care, social assistance and government, a sign that other industries more vulnerable to the economic slowdown are also beginning to shrink, he said.
Overall, the data raised concerns that the job market could be unexpectedly soft, a shift that would put the broader economy at risk. The latest data on labor market conditions will be released on Friday.
consumer resilience
Despite high loan interest rates, consumers continued to spend and buy major commodities such as cars, driving solid economic growth. The elasticity of spending is one of the key reasons why economists hope the Fed can curb inflation without triggering a recession.
Some even argue that high interest rates themselves are helping to support this spending, with wealthy families and retirees receiving a steady stream of income from bond investments and savings accounts. But many households, especially those on lower incomes who rely on credit to cover rising living expenses, are feeling the pinch of rising borrowing costs.
Federal Reserve data showed that credit card interest rates rose to 22.76% in May, slightly lower than the highest since 1994. In the first quarter, about 2.6% of credit card balances were 60 days past due, reaching a series of highs not seen since 2012 by the Philadelphia Fed.
Zandi said low-income households only accounted for 15% of overall consumer spending, but if this group struggled, the economy would not prosper.
business lending
High interest rates haven’t stopped big companies from borrowing as usual. Companies are taking advantage of strong demand from long-term investors such as pension funds and insurance companies, who are looking to lock in some higher spending ahead of the Federal Reserve cutting interest rates.
In addition, the long-term bonds they issue have fixed rates and have maturities of about 10 years, meaning they are not directly affected by Fed policy, said Hans Mikkelsen, managing director of credit strategy at TD Securities. Influence.
For small businesses, the story is very different. Default rates for leveraged loans, which typically carry floating rates, are expected to rise to a range of 5% to 5.5% this year, according to Fitch Ratings forecasts. If realized, this would be the highest level since 2009.
“The Fed’s monetary policy is causing people tremendous pain and many companies are going bankrupt,” Mixon said.
