Nah – it’s probably just a pinched nerve.

Just a few months ago the US news outlets, some experts, and Uncle John at the July 4th get together were pretty positive that we were heading towards the elusive soft landing (or a slow down in the economy without hitting a recession). Well now Uncle John is singing a different tune because he can not sell his house and his credit card interest rate has sky-rocketed to a record 20%. The two things the experts, the news, and Uncle John all have in common?

They can not see the future and they are feeling the pinch.

Were we really immune?

Nah – it is just a slow burn and the temperature is finally picking up. Rate hikes affect inflation and slow the economy in two ways:

1) Raising the cost of debt for exisiting borrowers (adjustable rates on your credit cards less consumer spending)
2) Discouraging new borrowing (think buying a home at a 7% interest rate and what it could do to the payment)

We really held onto the booming economy for a little longer because most debt is fixed, but the US is far from immune. Typically consumers start feeling the ‘pinch’ of a rising rate environment 12 to 18 months after rates begin to rise. Papa Powell started to aggressively fight inflation a bit more than a year ago in March 2022. Now that doesn’t mean that The Fed can’t find us a soft landing – it just means this is the point that they need to really start being careful with their decision to raise, lower, or leave the rates alone.

Where’s the cheap money?

Home equity lines of credit (HELOCs), Auto Loans, and credit cards have all had rates spike. Housing affordability is comparable (maybe worse) than the 2008 housing bubble with rates over 7%. So for the median household 43% of their income would be spent on a median-priced home.

To answer the question: There isn’t cheap money right now.

While The Fed did pause the rate hikes at their last meeting, they’re holding true to their ‘higher for longer’ mentality to get inflation back into their target of 2% to 3% with a target of 2026. This means we as consumers (borrowers) will see higher rates for longer and have to fight the good fight by cutting spending and dealing with the repercussions of the intense rate hikes.

Is there a silver lining?

Like anything we have pros and cons to the stagnant HIGH rate environment. Some things even have a little of both like the stock market. While the stock market has dipped a bit (con) since the interest rate hikes, that means for undervalued premium stocks it’s a buying opportunity (pro).

Pros:

• Savings Rates are higher. I use Ally and Wealthfront. It’s been fun watching my rate grow to 4.4% APY with other banks even higher. This is also pretty important since most consumers reactions (the hopeful reaction) is to hang on to more cash instead of putting it into circulation.
• Stocks are down. Basically if you can get a better return somewhere else you move your money. Rates rise and then future earnings look less attractive to other ways of seeing a return. The hardest hit stocks are typically ones with overvaluations. Although most investors say ride it out and dollar cost average in, emotion gets the best of people. This means if you’ve got capital and you are sticking to your guns on the undervalued stocks it’s buying season.

Cons:

• Stocks are down. The pro was that you can buy more at better prices. The con is that if you’re retiring or retired pulling from the market this really hurts. Also if you’re in need of capital at all right now, you’re potentially taking a loss.
• Rates to borrow hurt. If you are trying to buy a house right now it’s going to take a lot of capital. If you want to buy a car right now it’s more expensive. If you’ve got existing debt with an adjustable rate it just got more expensive to hold on to. The design is to slow dollar circulation and that means these kind of transactions.
• Larger scale economic issues. If less spending happens that means profits for companies are down. Then the board members get involved and realize they have an artificial way of boosting profits – cutting payroll (layoffs). We’ve already seen this in the past 12 months from Amazon to Walmart. This is just one example of what rates do to the greater incoming when spending is forcefully decreased.

These pros and cons impact everyone in the world in different ways. If you’ve had cash on hand and weren’t overly burdened with debt, this season of rate hikes hurt but are not crushing you. If you’re like the majority of Americans in the middle class with a minimum of $5,000 in credit card debt then this has been a tough couple of years. While it’s good to look at the pros here, we can’t ignore the cons of rate hikes and what is happening to the greater economy. The one silver lining here is that this is typically cyclical and hopefully Papa Powell lays us down softly. Here’s to hoping!