More than two years after the Federal Reserve began raising interest rates to slow growth and weigh on inflation, companies continue to hire, consumers continue to spend and policymakers are wondering why their hikes were not more aggressive.
The answer probably lies, in part, in a simple reality: High interest rates don't hurt Americans who own assets like homes and stocks as much as many economists may have done expected.
Some people are clearly feeling the pressure of Fed policy. Credit card fees have skyrocketed, and rising car loan delinquencies suggest that lower-income people are struggling under their weight.
But for many people in the middle and upper income brackets — especially those who own their homes outright or secured cheap mortgages when interest rates were at their lowest — this is a pretty sunny economic moment. The value of their homes is largely holding up despite higher interest rates, stock indices are near record highs, and they are able to earn a meaningful return on their savings for the first time in decades.
As many Americans feel comfortable with their personal finances, they continue to open their wallets for vacations, concert tickets, holiday gifts and other goods and services. Consumption remained surprisingly strong, even two years into the Fed's campaign to cool the economy. And that means the Fed's interest rate moves, which always take time to implement, appear to be even slower this time around.
“Household finances still look pretty good overall, although there is a group that is feeling the pain of high interest rates,” said Karen Dynan, a Harvard economist and former chief economist at the Treasury Department. “There are a lot of households in the middle and upper parts of the distribution that still have a lot of money to spend.”
The Fed meets in Washington this week, giving officials another opportunity to debate the economy and plan what's next for interest rates. Policymakers are expected to leave interest rates unchanged and not release economic forecasts at this meeting. But Jerome H. Powell, the Fed chairman, will hold a news conference after the central bank announces its interest rate decision on Wednesday afternoon, which will give the Fed an opportunity to share how it understands recent inflation and growth developments.
Officials have raised interest rates to about 5.33 percent from near zero in early 2022. Those higher central bank interest rates have trickled down to markets, driving up credit card interest rates and the cost of auto loans and helping 30-year mortgage rates rise from less than 3 percent shortly after the coronavirus pandemic hit to around 7 percent.
But the high interest rates have not affected everyone equally.
About 60 percent of homeowners with mortgages have interest rates below 4 percent, based on a Redfin analysis of government data. That's because many locked in to low borrowing costs when the Fed cut interest rates to rock-bottom levels during the 2008 recession or at the start of the 2020 pandemic. Many of these homeowners are reluctant to move.
This, along with a moderation in housebuilding, has led to a limited supply of homes for sale – meaning house prices have fluctuated only slightly after a sharp rise during the pandemic, although high interest rates have dampened demand. In major markets, property prices have risen by around 46 percent compared to the beginning of 2020. New house price data released on Tuesday showed a larger-than-expected rise.
At the same time, stock prices have staged a comeback since late 2023, partly because investors thought the Fed was done raising interest rates and partly because they were optimistic about the long-term prospects for companies as new technologies like artificial intelligence stoked hope.
The result is that household wealth, which initially fell after the Fed's first rate hikes in 2022, is now reaching new highs for people in the top half of the distribution. This happens when unemployment is very low and wage growth is solid, meaning people are taking in more money each month to keep up their spending.
“Last year, we were surprised by the resilience of the economy,” said Gennadiy Goldberg, interest rate strategist at TD Securities. He said the big question now is whether interest rates are simply too low to be a drag on the American economy or whether they will simply take longer to take hold and lead to slower growth.
“It's probably more the transmission side that's changed a little bit,” Mr. Goldberg said.
Even though the economy is strong, things don't feel good for everyone. Defaults on credit cards and auto loans are on the rise, a clear sign that some households are experiencing financial distress. Younger generations and people in low-income areas appear to be driving the trend, according to a New York Fed analysis.
Katie Breslin, 39, has both benefited and suffered from interest rate policy in recent years. She and her sister bought a house in Manchester, Connecticut, when prices were near rock bottom. But she's a student and has both student loans and credit card debt, including a credit card with an interest rate that recently reset to 32 percent. This leaves her with less disposable income each month as more of her income goes toward interest payments.
Paying off the balance in full seems to be a challenge, and expenses that previously seemed reasonable, such as an upcoming family trip to Ireland that she has already paid for, seem like luxuries to her.
“It just feels almost irresponsible to move forward now,” Ms. Breslin said of the trip. She used to order takeout weekly, but now she does so once a month, if at all.
High interest rates and rapid inflation have weakened Americans' confidence in the economy. But even as overall economic sentiment lags, many people report feeling okay about their own financial situation. Survey data from the New York Fed suggests that people across the income distribution continue to expect household income and spending to rise in the coming months, and that poorer people are slightly more optimistic than their wealthier counterparts.
Part of this could be due to another unusual aspect of this economic cycle. Although high interest rates usually lead to an increase in unemployment, this is not the case this time due to the resilience of the economy. The number of job openings has fallen, but hiring has remained rapid and unemployment is very low.
As a result, those working and earning lower incomes are often the hardest hit by job losses in a downturn.
The fact that many households are still doing well – and that some have largely escaped the effects of high interest rates – may help explain the economy's resilience.
Central bankers initially ignored the surprising resilience of the economy because inflation was already falling. At the start of the year they forecast three rate cuts before the end of 2024, and investors expected these to begin in March.
But recently inflation has stagnated at levels above the Fed's 2 percent target.
Persistent inflation is partly due to continued increases in service costs, which tend to respond to economic fundamentals such as wage increases. In short, there was evidence that an actual economic slowdown would be needed to further curb inflation.
This has led many central bankers to believe they are likely to keep interest rates higher for longer than expected. Investors originally expected the Fed to cut interest rates early this year, but now they expect the first cut to come in September or later.
So far, most central bankers believe that the problem is that interest rates take some time to kick in – rather than that they are too low to slow the economy.
“Tight monetary policy continues to weigh on demand, particularly in interest rate-sensitive spending categories,” Powell said in a speech this month.
That could mean a longer wait for people waiting for credit card fee relief and getting a foothold in the real estate market.