$600 billion boost to consumer spending offsets Fed tightening
US consumers have gained an estimated $600 billion in extra spending power thanks to mortgages locked in at low interest rates, according to an analysis by the Swiss Re Institute.
This $600 billion boost has helped soften the impact of the Federal Reserve’s interest rate hikes, allowing consumer spending to remain robust despite the tightening of monetary policy.
The financial relief from lower mortgage payments has been significant, amounting to nearly 2% of all personal consumption spending.
“A dollar not spent on mortgage payments is a dollar free to spend elsewhere. This helps explain why recent policy tightening did not, initially, appear to slow the economy,” Swiss Re analysts Mahir Rasheed and James Finucane wrote in the report.
The analysis suggests that this cushion provided by locked-in, low-rate mortgages has dampened the intended effects of the Fed’s rate hikes. As a result, consumer demand has stayed stronger than expected, complicating the Fed’s efforts to cool the economy.
The same dynamic could pose challenges when the Fed begins to cut rates, potentially limiting the effectiveness of monetary easing.
“Locked-in mortgage rates may similarly limit the effectiveness of monetary policy easing, adding to the list of downside risks to growth and also to affordability pressures,” the report read. “For example, year-on-year house price growth has moderated to below 6%, but prices remain 60% above 2020 levels.”
That limited impact of monetary easing could prompt the Fed to pursue a more aggressive rate-cutting strategy over the next year, according to the Swiss Re.
During the recent tightening cycle, market rates for new US mortgages were as much as 3.2% higher than the average rate on existing mortgages, according to the report. This discrepancy meant that a substantial portion of household debt was insulated from the Fed’s rate increases, possibly leading the Fed to hike rates more than it would have otherwise—a move that disproportionately affected renters.
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Swiss Re said the same mechanism could play out in reverse, pushing the Fed to cut rates more sharply if economic conditions warrant it. Despite slowing inflation, households are still grappling with high price levels, rising home prices, and increasing credit card delinquencies, all of which contribute to mounting debt burdens that may not see much relief from lower borrowing costs.
“Even as inflation slows, households will contend with affordability pressures as price levels remain elevated,” the analysts wrote.
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