In the year since the Federal Reserve raised interest rates to their highest levels in more than two decades, the central bank has succeeded in easing the pressure on the overheating U.S. economy. But the rise in borrowing costs has also had some unexpected effects.
High-income households reap the benefits of a booming stock market and rising home values. Businesses borrow at a rapid pace, and consumers are forced to bear the higher cost of living. keep spending.
But in other ways, a year of high interest rates is finally starting to take its toll. Americans are looking for jobs longer, and the unemployment rate has soared to record highs. rose by an inchSmall businesses are feeling the pain as the cost of loans rises. Low-income families are falling behind on loan payments. Car Loans And credit cards.
“Things have been deteriorating in the last couple of months, and Fed officials will be very concerned if they start easing faster,” said Veronica Clark, an economist at Citigroup, adding that would prompt officials to cut rates faster.
Policymakers are widely expected to keep interest rates steady when they meet next week, but investors expect the Federal Reserve to cut rates. start reducing Borrowing costs are set to rise in September. Until then, assessing how Fed policy is affecting the economy will help guide officials seeking to tame inflation without wrecking the labor market.
Housing Market
Higher interest rates have had the most visible impact on the U.S. housing market, where Fed policy has not only spurred higher borrowing costs but also driven up home prices. A measure of home affordability is nearing its lowest level in more than three decades of data.
With mortgage rates rising to about 7%, the average monthly mortgage payment for someone buying a median-priced home rose to $2,291 in May, up from $1,205 three years ago, according to the National Association of Realtors.
Economists had expected sales to fall in response to higher borrowing costs — and they did. “What was not anticipated was how strong the impact of the shutdown would be if the economy was not in recession,” he says. Ralph McLaughlinChief Economist at Realtor.com.
Existing homeowners, who received extremely low mortgage rates during the pandemic, are still reluctant to put their properties on the market. This has further limited the housing supply and pushed home prices to unprecedented levels.
stock boom
Higher interest rates typically act as an anchor for stocks by slowing business investment and growth. But investors largely shrugged off those concerns, allowing stock prices — and Americans’ retirement accounts — to soar to new highs.
The S&P 500 has risen about 25% since the Federal Reserve began raising interest rates in March 2022, adding about $3 trillion to household wealth.
But if the Fed doesn’t start cutting rates soon, “the market is going to be vulnerable,” says Mark Zandi, chief economist at Moody’s Analytics. “And current stock prices are clearly making investors expect a rate cut.”
Job market
The U.S. labor market, which has repeatedly defied expectations of slowdown despite rising interest rates, is finally showing signs of slowing.
Hiring has slowed from the highs of two years ago, companies are advertising fewer job openings, working Americans are less willing to quit, and the unemployed are finding it harder to find work.
The number of people out of work for 27 weeks or more, known as long-term unemployed, rose to 1.5 million in June, the most since 2017 except for a temporary spike during the pandemic, Aaron Terrasas said. Chief Economist at Glassdoor.
He said hiring has become more concentrated in a few sectors — such as health care, social assistance and government — a sign that other industries more vulnerable to an economic slowdown are starting to pull back.
Taken together, these numbers raise concerns that the labor market may be weakening unexpectedly, a shift that would put the economy as a whole at risk. New data on the state of the labor market is due out on Friday.
Consumer flexibility
Consumers have continued to spend and make big purchases like cars despite higher loan rates, fueling strong economic growth. The resilience of spending is one of the main reasons economists hope the Fed can tame inflation without sparking a recession.
Some have argued that the higher rates themselves help support this spending, as wealthier households and retirees see incomes fall. Income stream But many families, especially those on lower incomes who have turned to credit to keep up with rising living costs, are feeling the squeeze of higher borrowing costs.
Credit card interest rates rose to 22.76% in May, just below the record set in data dating back to 1994, according to Federal Reserve data. About 2.6% of credit card balances were past 60 days in the first quarter, representing 1.2% of total credit card balances. high chain In Philadelphia Federal Reserve data dating back to 2012.
Spending by low-income households represents only 15 percent of total consumer spending, but the economy cannot thrive if this group is suffering, Zandi added.
Commercial borrowing
But high interest rates haven’t stopped big companies from borrowing as much as they ever have. 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 of the higher payouts ahead of the Fed’s cuts.
In addition, the longer-term bonds they issue have fixed interest rates and maturities of about 10 years, which means they are not directly affected by what the Fed does, said Hans Mikkelsen, managing director of credit strategy at TD Securities.
The picture is very different for small businesses. The default rate on leveraged loans, which typically have variable rates, is expected to rise to a range of 5% to 5.5% this year, according to Fitch Ratings. If that happens, it would be the highest level in history for small businesses. Since 2009.
“There is a tremendous amount of pain and a lot of companies are on the verge of bankruptcy because of the Fed’s monetary policy,” Mikkelsen said.
