This week want to highlight some of the impacts higher interest rates are having on the economy.
The Fed has been raising rates now for over a year and a half. They have increased their overnight lending rate from 0% to 5.5% over that period. This is the largest increase in rates since the 1970s so of course it’s going to take a toll.
We’ll briefly discuss the interest rate increase’s impact on housing, consumer credit and companies.
Housing
The main impact of rising interest rates on the housing market is through the mortgage rate. From August 2021 to now, the 30 year fixed mortgage rate has increased from 2.80% to 7.31%. That is a massive move and has led to the worst housing affordability since 2006. As we’ve been predicting for several years, this has limited people’s ability to buy a home and pending home sales have crashed.
New buyers don’t have the down payment or income to qualify for a mortgage and existing home owners feel trapped in their current homes, which on average have a mortgage rate around 5%. Effectively the housing market is frozen. Home prices have held up pretty well, but transaction volume has plummeted.
Credit Cards
The average APR on credit cards this week was 28%. Its no wonder then that credit card defaults are exploding.
Since the start of the Fed’s hiking cycle, credit card default rates have doubled to nearly 3%. Most concerning is the growth rate of defaults is at a multi-decade high.
Corporations
Companies haven’t dodged the Fed’s interest rate bullet either. Banks have really tightened their lending standards to companies and it’s beginning to show in their results.
Start up firms have benefited for nearly a decade from extremely low interest rates but now with tighter lending criteria and higher rates, a surge of shutdowns has occurred.
As we mentioned last week, Small Cap companies have born the initial brunt of higher interest rates among the public companies. Interest expense per share has almost doubled in the last two years and is way beyond pre-covid levels.
This has led to a rapid increase in bankruptcies which are now back to Covid and Financial Crisis levels.
Overall, the Fed hiking cycle is having major impacts on consumers and companies. This month the Fed said that they expected to hold rates “higher for longer”. This is their standard operating procedure—raise rates until something breaks. Well, it looks to us, that lots of things are already breaking.
We expect them to continue their campaign against inflation until major banks and/or large firms get into trouble.
