29th September 2023 – (Washington) Federal Reserve Chair Jerome Powell may have put interest rate rises on pause for now, but the real economic adjustments from the highest borrowing costs in two decades have only just begun, experts warn.
Powell conceded further hikes were off the table for 2023 after delivering a fourth consecutive three-quarter point rise this week. But the Fed projects rates will remain elevated through 2024, dashing hopes of immediate relief as inflation eases.
The effects are already rippling through sectors reliant on access to affordable credit. With debt costs locked in at multi-year highs for the foreseeable future, vulnerabilities are surfacing that threaten to impair growth.
“This is an adjustment period that could get bumpy as debts come due,” said Douglas Holtz-Eakin, former CBO director. “Everything was built on cheap money and now businesses must think differently about their structures.”
Credit cards show potential fallout, with average rates topping 20% and total balances exceeding $1 trillion for the first time. Rising defaults signal consumers are reaching limits.
Corporate delinquencies are also increasing as firms struggle with refinancing leveraged loans or acquiring new financing. Bankruptcies loom as access to credit and forgiving underwriting tightens.
Property sectors face supply constraints as construction loans surge in cost. Office vacancies provoked by remote work ill the commercial market as $1.2 trillion in maturing loans come due.
Lower mortgage rates drove a building boom; now high rates price out buyers while inventories remain low, interrupting the cycle. Monthly payments on new homes recently hit all-time highs.
“What we’re seeing in housing and CRE is those sectors face significant readjustment to higher rates – supply and demand imbalances could persist,” said Jan Hatzius of Goldman Sachs.
Though robust jobs have kept recession at bay, sustained rate hikes raise downside risks if companies hoarding workers start cutting positions rapidly. The diminished consumer wealth effect also weighs on spending.
Fed officials argue a “soft landing” brings only moderate economic pain, confident labour strength and healthy balance sheets can weather ongoing rate restrictions. But the drained buffers of past stimulus leave room for errors.
With lower inflation projections and economic slack still absent, Powell concedes the path higher may run longer than originally anticipated. That compounds challenges for sectors transitioning to pricier capital.
“The Fed was always playing catch up and could be behind the curve on how rate hikes actually impact the economy,” cautions Holtz-Eakin. “It’s an experiment we haven’t run before in this context.”
Policymakers may take solace in avoiding a downturn through 2024. But anaemic growth driven by protracted tight conditions still saps momentum and strains deficit projections crucial to President Biden’s reelection hopes.
As the necessary medicine of policy adjustments spreads financial pain, leadership in monitoring fallout and limiting collateral damage will be key to navigating this extended transition. The duration of challenges now crystallizing may similarly test America’s economic grit and resilience.