Since 2022, low-cost fixed-rate mortgages have given US consumers an additional $600 billion in spending power, mitigating the effects of the Federal Reserve’s interest rate hikes, according to a Swiss Re Institute analysis. Economists Mahir Rasheed and James Finucane report that this windfall, equivalent to nearly 2% of total personal consumption spending, has softened the impact of monetary policy changes.
This effect has made consumer demand more resilient to Fed rate hikes, and it is likely to counterbalance the effectiveness of anticipated rate cuts. As a result, stimulating consumer demand could become more challenging if the economy slows, potentially leading to a more pronounced easing cycle than currently projected by Swiss Re.
During the recent Fed tightening phase, US mortgage market rates exceeded the average rates on existing mortgages by up to 3.2 percentage points, Swiss Re’s analysis shows. The shielded impact of monetary policy on a significant portion of household debt might have led the Fed to raise rates more than it might have otherwise, indirectly penalizing renters.
Looking ahead, the reverse effect could occur with lower rates, pushing the Fed to implement more aggressive rate cuts. The median home price has surged about 60% since early 2020, and credit card delinquencies have surpassed pre-pandemic levels, indicating increased household debt burdens. This situation suggests that reduced borrowing costs may offer only limited relief.
