U.S. homeowners got $600B boost from ultra-low mortgages, researchers say
Americans who were fortunate enough to lock in their mortgages at record-low rates got a $600 billion spending boost since 2022.
According to Swiss Re Institute economists Mahir Rasheed and James Finucane, this $600 billion boost represents the payment gap between existing mortgage rates and the ones homeowners obtained before the Federal Reserve began hiking interest rates in 2022.
It also accounts for up to 2% of homeowners’ disposable income over that period.
The economists said this gap explains why consumer spending has been so resilient in the face of higher interest rates, and why the Fed had such a difficult time controlling inflation in 2022 and 2023.
It also partly explains why higher interest rates haven’t necessarily resulted in lower home prices. According to the economists, “year-on-year house price growth has moderated to below 6%, but prices remain 60% above 2020 levels.”
These findings suggest that housing affordability could worsen when interest rates begin to fall, which a historical study conducted by Creditnews Research has already corroborated.
According to the Swiss Re economists, the diminishing impact of interest rates on the economy will be similarly felt when the Fed begins to lower rates later this year. In other words, cutting interest rates won’t be as reliable a tool to stave off recession as it was in the past.
Will the Fed get desperate?
If rate reductions don’t stimulate growth as the Fed expects, policymakers could be forced to cut interest rates more aggressively.
Rasheed and Finucane believe there’s a strong possibility for a “sharper easing cycle over the next year,” referring to more aggressive rate cuts.
The U.S. economy is already flashing warning signs, which has pushed up the Fed’s timeline for rate cuts to September.
Fed Chairman Jerome Powell implied strongly last week that a September rate cut was a done deal, conceding that the labor market was weakening more than he expected.
As Creditnews reported, the national unemployment rate spiked to 4.3% in July, the highest in nearly three years. Although relatively low by historical standards, it has increased by more than half a percentage point since the start of the year.
This large magnitude of change has put economists on high alert about a possible recession over the next 12 months.
Depending on how quickly things deteriorate, the central bank may feel the need to lower interest rates in larger increments than the standard 0.25% moves. According to CME Group’s FedWatch Tool, investors have increased their odds of a 0.50% reduction in September to just over 30%.
The Fed will announce its next policy decision on Sept. 18, with accompanying forecasts for inflation, GDP growth, unemployment, and interest rates.
According to the FedWatch Tool, further rate reductions are expected at the central bank’s November and December policy meetings.