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High interest rates for a long time in the US

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The strength of the US economy allows the Fed to keep borrowing costs high for a long time

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The era of ultra-low interest rates may be over for good. The Fed decided this week to keep interest rates unchanged at their highest level in 20 years and left open the possibility of raising them again before the expiration of 2023. But an even more significant, if subtle, change lurks in recently released economic data. bank forecasts. Its officials do not expect interest rates to go much higher, and the next hike is likely to be the last, not a certainty. However, they estimate that borrowing costs will remain high in the coming years, with the short-term benchmark rate above 5% in 2024 and close to 4% at the end of 2025. This would be roughly double what it was at the end of 2019. 2026, the Fed hopes, inflation will have been completely eliminated and economic growth will have returned to its long-term trend. Even so, its officials foresee interest rates remaining well above pre-pandemic levels. This conclusion is drawn in part from a simple observation: The Fed has raised interest rates aggressively over the past year and a half, yet the economy has barely reacted. This suggests that after years in which even the slightest rise in interest rates threatened to stall growth, the economy can finally afford higher borrowing costs.

“They've been surprised at how strong the economy has been this year despite a lot of monetary tightening by the Fed,” said Gabriel Chodorov-Reich, a professor of economics at Harvard, referring to Fed officials. On Wall Street, analysts began to summarize the Fed's new worldview in a simple phrase: “Higher for longer.” A new era of higher interest rates would be a significant development for many households, especially would-be home buyers, who dream of getting their mortgage rate back to 3%. The Fed's moves in interest rates ripple through the financial fabric, making it more expensive to borrow to buy a vehicle, home or expand business operations. In conclusion, high interest rates are bad news for big investors, who made big profits by placing bets using borrowed cash when “free money” was plentiful before the pandemic. And perhaps the interest rates will cause problems for borrowers with massive outstanding debt – a problem faced by both commercial real estate companies and the US government, which is steadily spending more on interest alone on its debt.

Source: www.kathimerini.com.cy

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