More than two years after the Federal Reserve started lifting interest rates to restrain growth and weigh on inflation, businesses continue to hire, consumers continue to spend and policymakers are questioning why their increases haven’t had a more aggressive bite.
The answer probably lies in part in a simple reality: High interest rates are not really pinching Americans who own assets like houses and stocks as much as many economists might have expected.
Some people are feeling the squeeze of Fed policy. Credit card rates have skyrocketed, and rising delinquencies on auto loans suggest that people with lower incomes are struggling under their weight.
But for many people in middle and upper income groups — especially those who own their homes outright or who locked in cheap mortgages when rates were at rock bottom — this is a fairly sunny economic moment. Their house values are mostly holding up in spite of higher rates, stock indexes are hovering near record highs, and they can make meaningful interest on their savings for the first time in decades.
Because many Americans feel good about their personal finances, they have also continued opening their wallets for vacations, concert tickets, holiday gifts, and other goods and services. Consumption has remained surprisingly strong, even two years into the Fed’s campaign to cool down the economy. And that means the Fed’s interest rate moves, which always take time to play out, seem to be even slower to work this time around.
“Household finances broadly still look pretty good, though there is a group feeling the pain of high interest rates,” said Karen Dynan, an economist at Harvard and a former chief economist at the Treasury Department. “There are a lot of households in the middle and upper part of the distribution that still have a lot of wherewithal to spend.”
The Fed meets in Washington this week, which will give officials another chance to debate the economy and plot what comes next with interest rates. Policymakers are expected to leave rates unchanged and are not scheduled to release economic projections at this meeting. But Jerome H. Powell, the Fed chair, will give a news conference after the central bank releases its rate decision on Wednesday afternoon, providing a chance for the Fed to communicate how it’s understanding recent inflation and growth developments.
Officials have raised interest rates to about 5.33 percent, up from near zero in early 2022. Those higher central bank policy rates have trickled through markets to push up credit card rates and the cost of auto loans, and have helped to prod 30-year mortgage rates to about 7 percent, up from less than 3 percent just after the onset of the coronavirus pandemic.
But hefty rates have not hit everyone equally.
About 60 percent of homeowners with mortgages have rates below 4 percent, based on a Redfin analysis of government data. That’s because many locked in low borrowing costs when the Fed cut rates to rock bottom during the 2008 recession or at the onset of the 2020 pandemic. Many of those homeowners are avoiding moving.
That has combined with a moderation in home construction to make for a limited supply of housing for sale — which means that even though high interest rates have curbed demand, home prices have cooled only slightly after a big run-up during the pandemic. Across major markets, home prices are still up about 45 percent from early-2020 prices.
At the same time, stock prices have made a comeback since late 2023, in part because investors thought that the Fed was done raising rates and in part because they felt optimistic about the long-run outlook for companies as new technologies like artificial intelligence stoked hope.
The result is that household wealth, which at first dipped after the Fed’s initial rate increases in 2022, is now tracing new highs for people in the upper half of the distribution. This is happening when unemployment is very low and wage growth is solid, meaning that people are taking in more money each month to sustain their spending.
“Over the past year, we’ve been surprised” by the economy’s resilience, said Gennadiy Goldberg, a rates strategist at TD Securities. He said the big question now was whether rates were just too low to weigh on the American economy or if they were simply taking longer to transmit through and translate into slower growth.
“It’s probably more that transmission side that’s a little changed,” Mr. Goldberg said.
Even with a strong economy, things do not feel great for everyone. Credit card and auto loan delinquencies have been climbing, a clear sign that some households are feeling financial stress. Younger generations and people in low-income areas appear to be driving the trend, based on analysis by the New York Fed.
Katie Breslin, 39, has both benefited and suffered from rate policy in recent years. She and her sister bought a house in Manchester, Conn., when rates were near rock-bottom. But she is in graduate school and has both student loan and credit card debt, including one credit card with an interest rate that recently reset to 32 percent. This is leaving her with less disposable income each passing month, as more of her income goes to interest payments.
Paying the balance in full seems like a reach, and expenditures that seemed reasonable before, like an upcoming family trip to Ireland that she already paid for, feel like splurges.
“It just feels almost irresponsible to go on it now,” Ms. Breslin said of the trip. She used to order takeout weekly, but now she does so once a month, if that.
High rates have combined with rapid inflation to chip away at Americans’ confidence in the economy. But even as economic sentiment overall lags, many people report feeling OK about their own financial situations. Survey data from the New York Fed suggest that people across the income distribution still expect both their household incomes and their spending to climb in the months ahead, and that poorer people are slightly more optimistic than their wealthier counterparts.
Part of that could be because of another unusual aspect of this business cycle. Even though high interest rates usually increase unemployment, the economy’s resilience means that hasn’t happened this time. Job openings have come down, but hiring has remained quick and joblessness is very low.
As a result, the lower-income people who are often most vulnerable to job losses in a downturn are still working and earning money.
The fact that many households are still managing — and that some have been very insulated from the effects of high rates — could help to explain the economy’s resilience.
Central bankers initially brushed off the economy’s surprising robustness because inflation was coming down anyway. Going into the year, they were projecting three rate cuts before the end of 2024, and investors expected those to start by March.
But more recently, inflation had stalled out at a rate above the Fed’s 2 percent target.
The inflation stickiness has come partly because of a continued pickup in services costs, which tend to respond to economic fundamentals like wage gains. In short, there have been hints that it may take more of an actual economic cool-down to wrestle inflation down further.
This has prompted many central bankers to suggest that they are likely to keep interest rates higher for longer than they were previously expecting. Investors initially anticipated the Fed would cut rates early this year, but they now see the first reduction coming in September or later.
For now, most central bankers have suggested that the issue is that rates are taking time to work — not that they are too low to slow the economy.
“Tight monetary policy continues to weigh on demand, particularly in interest-sensitive spending categories,” Mr. Powell said in a speech this month.
For people waiting for relief in credit card rates and to gain a foothold in the housing market, that could mean a longer wait.
