Impact in U.S. Economy: One Year of High Interest Rates

The impact in U.S. economy has been profound since the Federal Reserve increased interest rates to their highest levels in over twenty years. While this action has successfully cooled an overheated economy, it has also resulted in some unexpected consequences due to the higher borrowing costs.

Wealthier households are enjoying the advantages of a thriving stock market and increasing home values. Corporations are borrowing rapidly, and consumer spending remains strong. However, the impact of a year of elevated interest rates is beginning to show. Americans are dedicating more time to job searches, with the unemployment rate rising slightly. Small businesses are struggling with higher borrowing costs, and lower-income households are facing difficulties keeping up with car loan and credit card payments.

Fed’s Concern

“Things have softened in the last couple of months, and Fed officials are going to be pretty concerned if they start softening more rapidly,” said Veronica Clark, an economist at Citigroup Inc. This could lead officials to cut rates more quickly.

Policymakers are widely expected to keep interest rates steady when they meet next week. However, investors anticipate the Fed will begin lowering borrowing costs in September. Until then, evaluating how Fed policy is impacting the economy will help guide officials seeking to tame inflation without wrecking the job market.

Housing Market Impact

Rate hikes had a clear impact on the US housing market. Fed policy led to higher borrowing costs and rising home prices. With mortgage rates around 7%, the monthly payment for a median-priced home reached $2,291 in May. This is up from $1,205 three years ago, according to the National Association of Realtors.

Economists predicted that sales would drop due to the increased borrowing costs, and their forecast proved accurate. However, Ralph McLaughlin, senior economist at Realtor.com, noted that the significant impact of the lock-in effect was surprising, especially in a non-recessionary economy. Homeowners who locked in exceptionally low mortgage rates during the pandemic are now hesitant to sell their properties. This reluctance has further constrained the already limited housing supply, driving property prices to unprecedented levels.

Rate hikes have significantly impacted the housing market, increasing borrowing costs and constraining supply, thus elevating prices, according to WSJ Subscription Offers.

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Stock Market Boom

Higher interest rates typically act as an anchor on stocks by slowing business investment and growth. But investors have largely shrugged off those concerns, allowing equity prices — and Americans’ retirement accounts — to surge to new levels. The S&P 500 has climbed about 25% since the Fed started raising rates in March 2022, adding about $3 trillion to household wealth.

Job Market Changes

The US job market, which bucked expectations of a slowdown time and again despite high rates, is finally showing signs of cooling. Hiring has slowed from the overheated levels seen two years ago, and companies are posting fewer job openings. Employed Americans are quitting less, and those out of work are finding it harder to land a job.

Small Businesses Struggle

High interest rates haven’t deterred large corporations from borrowing as much as before. However, smaller businesses face a different scenario. The default rate on leveraged loans, with variable rates, is expected to rise to 5% to 5.5% this year. Fitch Ratings has provided these forecasts. Hans Mikkelsen of TD Securities states, “There’s tremendous pain and many companies are going bust due to the Fed’s policy.”

The economic landscape remains complex as the Fed navigates its policy decisions, aiming to balance cooling inflation with sustaining growth and employment.

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