Wealthier Buyers May Mean Higher Interest Rates Over the Long Term | So Good News


Washington’s response to the pandemic has left household and business finances surprisingly strong, keeping interest rates high and interest rates low. It would also make the Federal Reserve’s job of reducing inflation more difficult.

The US central bank is trying to slow economic growth so that inflation is not sustainable. To that end, it has increased significantly this year and is likely to raise another 0.75 percent at the two-day policy meeting that ends on Wednesday. That would bring the benchmark federal-funds rate up to 3.75% to 4%.

Some officials have said they will delay rate hikes after this week’s meeting. But the debate about the pace of growth may obscure a more important issue behind rising prices. In the economic outlook released at the Fed’s last meeting in mid-September, most officials expected interest rates to reach 4.6% by early next year.

But some economists think it should go higher than 4.6%, citing reduced spending and higher interest rates.

“The big question will be, given the strength of the economy that has kept interest rates up so far, whether that will be enough,” said former Boston Fed President Eric Rosengren. “The danger is that they have to do more than they think.”

Interest rate hikes have flooded the US economy, and more are expected to happen. The WSJ breaks down the numbers hitting America’s wallets this year and beyond. Photo: Elise Amendola/Associated Press

Money fights inflation by slowing down the economy by using economic pressures—such as excessive borrowing and inflation—that stifle spending, further reducing employment, investment and income. This often has an impact on the economy which is heavily influenced by the cost and availability of credit.

In 2020, however, the government’s war-like response to the pandemic – economic stimulus that boosted household income and reduced mortgage payments – has faltered in a recession that has seen rising unemployment that has exacerbated deficits and deficits. It means that the privacy policy is in a very strong position.

Households, non-financial corporations and small businesses earned more than total spending, accounting for 1.1% of gross domestic product in the April-June period, according to economists at Goldman Sachs Group. Inc.

Using a three-year average, this measure is better than yesterday for any recession in the US since the 1950s.

US households will still have $1.7 trillion more in savings by 2021 than they would have saved had the economy grown in line with the economy, according to Fed economists’ estimates. About $350 billion of the excess savings in June was saved by the lower half of the income distribution, or about $5,500 per household.

Businesses were also able to lock in low borrowing costs as interest rates fell in 2020 and 2021. Only 3% of junk bonds, or those issued by companies with no credit ratings, mature next year, and only 8% come due. because before 2025, according to Goldman Sachs.

State and local governments also have more cash, leaving them in a better position than they were after the recession in 2007 to 2009.

Although the housing market – which is among the areas most affected by the financial crisis – is entering a deep recession, the rest of the economy is working together. Credit card banks are on the rise. Reports have come from companies including United Airlines Holdings Inc., Bank of America Corp., Nestlé SA,

Coca Cola Co.

and Netflix Inc.

it also reflects strong consumer demand and rising prices.

“This is not the season to make money [Fed] I want to see,” said Samuel Rines, managing director at Corbu LLC, a market intelligence firm in Houston. “Right now, the consumer is too strong to be comforted.”

The Commerce Department reported on Friday that consumer spending adjusted for inflation rose 0.3% in September from August, a figure from the previous months.

The result is that cooling the US economy may require higher interest rates. The housing stockpile “tells me we’re going to be stuck for a while,” Federal Reserve Bank of Kansas City President Esther George said in a webinar earlier this month.


How much should the Fed raise interest rates, and why? Join the conversation below.

Ms. George is among Fed officials who have argued against lowering interest rates. But he also said the central bank’s direction may be higher than expected and that the Fed should remain on the horizon.

A tight labor market also accounts for this. Not only does it bring higher wages that can raise prices, but it can also continue to use consumer spending even when households fail to save.

check the buy side from wsj

Expert opinions on products and services, independent of The Wall Street Journal.

Wages and benefits for workers continued to rise rapidly in the third quarter, according to a Labor Department measure released Friday that is monitored by the Fed. The labor cost index, a measure of what employers pay for wages and benefits, showed that wages and benefits for private sector workers excluding paid work rose 5.6% from a year earlier.

Jason Furman, a Harvard economist who served as a senior adviser to former President Obama, thinks it will be difficult for the Fed to reduce the economy. He said he sees the feed rate reaching 5.25% next year, with the biggest risk of going much higher.

Steven Blitz, chief US economist at research firm TS Lombard, thinks the central bank’s policy rate will rise to 5.5%. “A recession is coming in 2023, but there’s still a lot of work for the Fed to do to create one,” he said.

Silver’s interest rate may be that strong corporate balance sheets prevent any decline in the US The risk is that higher interest rates or a stronger dollar will cause problems in parts of the global financial system that are expected to be low interest rates. persevere.

Contact Nick Timiraos at [email protected]

Copyright ©2022 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8


Source link