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In the year since the Federal Reserve brought interest rates to a more than two-decade high, the central bank has succeeded in taking the steam off of an overheated US economy. But higher borrowing costs have also had some unexpected effects.\u00a0<\/p>\n
Higher-income households are reaping\u00a0the benefits of a booming stock market\u00a0and rising home values. Corporations are borrowing at a fast\u00a0clip, and consumers\u00a0continue to spend<\/a>. \u00a0<\/p>\n But in other ways, a year of high interest rates is finally beginning to take a toll. Americans are searching longer for jobs, and the unemployment rate has\u00a0inched higher<\/a>. Small businesses are feeling the pain from costlier loans. And lower-income households are falling behind on payments for their\u00a0car loans<\/a>\u00a0and credit cards.<\/p>\n \u201cThings have softened in the last couple months, and Fed officials are going to be pretty concerned if they start softening more rapidly,\u201d\u00a0said Veronica Clark, an economist at Citigroup<\/a> Inc, adding that would lead officials to cut rates more rapidly.<\/p>\n Policymakers are widely expected to keep interest rates steady when they meet next week, but investors anticipate the Fed will\u00a0begin lowering<\/a>\u00a0borrowing costs in September. Until then, evaluating how\u00a0Fed policy is \u2014\u00a0and isn\u2019t \u2014\u00a0impacting the economy will help guide officials seeking to tame inflation without wrecking the jobs market.\u00a0\u00a0<\/p>\n Rate hikes had the clearest impact on the US housing market, where Fed policy not only spurred a surge in borrowing costs but also a run-up in home prices. A measure of home affordability is near its lowest level in more than three decades of data.\u00a0<\/p>\n With mortgage rates hovering around 7%, the monthly mortgage payment for someone buying a median priced home climbed to $2,291 in May, up from $1,205\u00a0three\u00a0years earlier, according to the National Association of Realtors.\u00a0<\/p>\n Economists expected sales to decline in response to the higher borrowing costs \u2014 and they did. \u201cWhat was unexpected is how powerful the lock-in effect can be if the economy is not in a recession,\u201d said\u00a0Ralph McLaughlin<\/a>, senior economist for Realtor.com.<\/p>\n Existing homeowners, who secured ultra-low mortgage rates during the pandemic, are still reluctant to put their properties on the market. That made a limited supply of homes even more limited and pushed housing prices to new heights.\u00a0<\/p>\n Higher interest rates typically serve as an anchor on stocks by slowing business investment and growth. But investors have largely shrugged off those concerns, allowing equity prices \u2014 and Americans\u2019 retirement accounts \u2014 to surge to new levels.\u00a0<\/p>\n The S&P 500 has climbed about 25% since the Fed started raising rates in March 2022, adding about $3 trillion\u00a0to household wealth. \u00a0<\/p>\n If the Fed doesn\u2019t start lowering rates soon, however, \u201cthe market\u2019s going to be vulnerable,\u201d said Mark Zandi, chief economist for Moody\u2019s Analytics. It\u2019s \u201cembedded in current stock prices that\u00a0investors expect rate cuts.\u201d<\/p>\n The US jobs market, which bucked expectations of a slowdown time and again despite high rates, is finally showing signs of cooling.\u00a0<\/p>\n 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.<\/p>\n The number of people who have been out of work for 27 weeks or more, known as long-term unemployed, rose to 1.5 million in June, the most since 2017 with the exception of a temporary spike during the pandemic, said Aaron Terrazas,\u00a0<\/strong>chief economist for Glassdoor.\u00a0<\/p>\n Hiring has become more concentrated to just a few sectors \u2014\u00a0like healthcare, social assistance and government \u2014 a sign that other industries more vulnerable to economic slowdowns are starting to pull back, he said.\u00a0<\/p>\n Taken together, the figures raise concerns that the job market could weaken unexpectedly, a turn that would put the overall economy at risk. Fresh data on the state of the labor market will be published Friday.\u00a0<\/p>\n Consumers have continued to spend and make major purchases such as cars despite high loan rates, fueling solid economic growth. The resilience of spending is one of the key reasons economists are hopeful the Fed can tame inflation without sparking a recession.<\/p>\n Some have even argued high rates themselves are helping to support that spending, with wealthier households and retirees seeing a\u00a0stream of income<\/a>\u00a0from their bond investments and savings accounts.\u00a0But many households,\u00a0particularly those with lower incomes\u00a0who turned to credit to keep up with rising living expenses, are feeling the squeeze of elevated borrowing costs.\u00a0<\/p>\n Interest rates for credit cards rose to 22.76%\u00a0in May, just shy of a record in data back to 1994, Fed data show. Some 2.6% of credit card balances were 60 days past due in the first quarter, reaching a\u00a0series high<\/a>\u00a0in data from the Philadelphia Fed that goes back to 2012.\u00a0<\/p>\n Spending from low-income households only accounts for 15% of overall consumer spending, but the economy cannot thrive if that group is struggling, said Zandi.\u00a0<\/p>\n High interest rates haven\u2019t stopped large corporations from borrowing as much as they ever have.\u00a0Firms are taking advantage of robust demand from long-term investors, such as pension funds and insurance companies, that are seeking to lock-in some higher payouts before the Fed cuts.\u00a0<\/p>\n Plus, the longer term bonds they issue have fixed rates and about 10 years of maturity, meaning they are not as directly affected by what the Fed does, said Hans Mikkelsen, managing director of credit strategy at\u00a0TD Securities.<\/p>\n The picture is much different for smaller businesses. The default rate on leveraged loans, which typically have\u00a0variable rates, is projected to rise to a range of 5% to 5.5% this year,\u00a0according to forecasts from Fitch Ratings. If realized, that would be the highest level\u00a0since 2009<\/a>.\u00a0<\/p>\n \u201cThere\u2019s a tremendous amount of pain and many, many companies that are going bust because of the Fed\u2019s monetary policy,\u201d Mikkelsen said.<\/p>\n<\/div>\nHousing Market\u00a0<\/h2>\n
Stock Boom<\/h2>\n
Job Market<\/h2>\n
Consumer Resilience<\/h2>\n
Business Borrowing<\/h2>\n
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