Are the Fed’s rate increases working?

NEW YORK – The Federal Reserve this year has raised interest rates at the fastest pace since the 1980s, making it increasingly expensive to borrow money as it seeks to slow consumer and business demand and drive inflation lower.

So far, those moves are making more of a splash than a wave.

The Fed has lifted interest rates to nearly 4 per cent this month from just above zero in March, and those moves are clearly rippling through financial markets. The housing market has slowed as mortgage rates have surged, and some specific industries — most notably technology — are feeling the pinch. But other parts of the US economy, including consumer spending and the labour market, have proved surprisingly resilient to the central bank’s interest rates changes.

Economists are closely watching for any sign that those areas of economic strength are beginning to crack. Some are warning that the slowdown is coming but will simply take time to fully play out, because the interest rate moves already enacted will take months or years to have their entire effect.

Here’s where rate increases are having an effect, where they aren’t and why it matters.

Interest-sensitive sectors are slowing

What’s happening in the housing market is clear evidence that the Fed’s moves are having an effect. Mortgages are at their most expensive in 20 years, with borrowing costs on a 30-year fixed rate loan hovering near 7 per cent. Buyers are giving up as prices remain high and borrowing becomes unaffordable: Pending home sales have swooned, new-housing construction has pulled back sharply, and existing home sales have fallen for a record nine straight months.

Some experts in the car industry also expect used-vehicle demand to wane and prices to fall in the coming months, in part because auto loans have become pricier. Pre-owned car prices already declined notably in October inflation data.

Technology companies are also feeling the pain

If there’s one industry that shows clear signs of hurting right now, it’s technology.

Part of the pullback is tied to the Fed: Technology stock values are premised on future growth and are particularly exposed to Fed rate moves, and many have taken a hit this year. But beyond that, e-commerce soared amid pandemic stay-at-home orders and has now returned to a more normal growth path. Company-specific decisions are also roiling the industry: Meta bet big on virtual reality, and Twitter was recently acquired by Elon Musk.

As technology companies confront challenges and changes, some have announced big layoffs, including Amazon, Meta and Twitter. But tech companies account for just about 2 per cent of the nation’s employment, said Nela Richardson, chief economist at payroll services and data provider ADP. Even substantial firings in the industry would not be enough to meaningfully cool off the broader economy.

“I don’t think tech is indicative of the broader economy,” Ms Richardson said. Plus, a layoff is not a life sentence, and opportunities for tech workers are plentiful.

“Some of these workers might be absorbed into other jobs and industries,” she said.

But the labour market is what economists call a lagging indicator. It slows down only when the broader economy has started to turn. If the Fed waits for the job market to pull back notably to stop aggressively adjusting its policy, it may wait too long.

Source link

Denial of responsibility! planetcirculate is an automatic aggregator around the global media. All the content are available free on Internet. We have just arranged it in one platform for educational purpose only. In each content, the hyperlink to the primary source is specified. All trademarks belong to their rightful owners, all materials to their authors. If you are the owner of the content and do not want us to publish your materials on our website, please contact us by email – [email protected]. The content will be deleted within 24 hours.