Many eyes are on the Federal Reserve and its future interest rate hikes. Although these changes spark short-term momentum, they have almost no long-term impact. Several reasons exist why that is the case, further nullifying these decisions for most people.
Fed Interest Rate Hikes Aren’t Helping
It is commendable to see central banks attempt to curb a problem they created. Inflation directly results from central banks messing things up for entire nations. Unfortunately, it has been a growing problem, and little can be done to avoid it. Even the “might interest rate hikes” have little or no impact in 2023. Nor will they for some time to come, as their impact is virtually zero.
One thing the Fed – and other central banks – don’t understand is how the current economy works. It is a different creature from the pre-COVID era. All participants have thrown old rules out of the window except central banks. As such, the “big impact” of rate hikes no longer exists. Numbers going up with no lasting impact will eventually result in much bigger problems to tackle.
The upside is that these hikes do not trigger a negative economic impact yet. However, that will all change eventually, triggering a domino effect once it does. The Fed wants to cool demand across the US economy, yet consumers and businesses seem to double down. That is remarkable, but this trend is attributed to several factors and developments.
Low Interest Rates Have Lasting Effects
The past few years have been pretty good for those looking to borrow money. Overall, interest rates have dropped significantly in the past 15 years, removing the strong focus on “variable interest rates”, which benefits consumers and businesses.
When there is no variable interest rate, interest rate hikes have less – or no – impact on payments. That means overall household budgets remain unchanged, and consumers can continue to spend like they have been all this time.
Accumulated COVID Savings
Another effect of the COVID-19 pandemic is how many people got a chance to save up money. So many places were shut down, and social life stopped for almost two years. As such, people could stockpile money for a rainy day. Although life has returned to “normal”, those savings have not run out yet. That enables consumers and businesses to continue spending as they see fit without skipping a beat.
However, consumers have also turned acing money into a new hobby. Most people save more money than before because they finally figured out how to do so. In addition, higher interest rates yield higher dividends for savers. As such, the Fed’s interest rate hikes make saving more appealing than ever.
Strong Services Spending
A final contributing factor is consumer spending on services. More specifically, households show a decreased appetite for goods and favor services, including traveling, dining, concerts, events, sports, etc. Being cooped up at home for two years has given people a newfound appreciation for doing things outdoors, which is good. In addition, strong spending on services creates a healthy labor market, further reducing the impact of interest rate hikes.
As demand for services increases, employers need to step up their staffing. That cycle creates more jobs, better overall spending, and negates anything the Fed does. That growth can’t be sustained forever, though, but it remains slightly below pre-COVID demand for now.
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