Invisible hikes
Last week, the Fed resumed its interest rate hiking campaign, with its 11th raise since March 2022, bringing rates to a 22-year high.
As you may have learned in ECON theory 101, raising interest rates should see consumers cut back on spending, as higher debt repayments and charges cut into finances — however, the reality is a lot less straightforward. Many consumers secured ultra-low rates on their debts during the periods of rock-bottom interest rates, and only 11% of US household debt actually adjusts along with market interest rates, according to data from Moody’s Analytics (via WSJ).
Fixed or floating?
Fixed-rate debt has gained popularity after the role adjustable-rate mortgages played in the 2008 financial crisis. The prevalence of fixed-rate mortgages has potentially contributed to the ongoing housing shortage — in the first half of this year, a mere 1.4% of US homeowners sold their homes, the lowest figure in at least a decade. Current homeowners are understandably hesitant to wade back into the mortgage market if they’ve already locked in a good fixed rate, which is leaving buyers with few options.
Over time, the full effect of rising interest rates will filter through the entire economy. The guessing game that the Fed has to play is: how long is it going to take?
