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US Economy Resilient Amid High Federal Funds Rate

2023.12.13

 

Key Takeaways

  • The U.S. economy continues to grow despite the Federal Reserve’s 5.5% interest rate setting in 2023.
  • Experts warn of long-term impacts on GDP and borrowing, with faster market responses to Fed policies.

Impact of Federal Reserve’s Interest Rate Decision

The U.S. economy has shown resilience in the face of the Federal Reserve’s decision to set the benchmark federal funds interest rate at 5.5% in 2023. This rate hike aims to moderate the economy’s growth, primarily affecting new borrowers like first-time homebuyers. However, its impact is not immediate, as various economic dynamics, including contractual commitments in business, can delay the full effect of the Federal Reserve’s decisions.

Consumer Response and Economic Analysis

Sarah House, a senior economist at Wells Fargo, notes that consumers’ additional savings, accumulated unexpectedly during the Covid-19 pandemic, provide some buffer against the need to borrow. This factor could alter the traditional timeline of the economic impact compared to previous cycles. According to research from the Federal Reserve Bank of San Francisco, a 1% interest rate increase can potentially reduce the gross domestic product by 5% over 12 years following an unexpected hike.

Concerns and Market Dynamics

Concerns arise around potential increases in unemployment and recession risks in the short term, with long-term implications for wage growth and productivity. Douglas Holtz-Eakin, president of the American Action Forum, emphasizes these concerns. Federal Reserve Governor Christopher Waller suggests that financial markets may react more swiftly to policy announcements, rather than the actual implementation of rate changes.

Variability in Market Response

The variability in the stock market’s response to the Federal Reserve’s cycle of policy tightening indicates that the impact on the economy can vary in speed. Former Federal Reserve Vice Chair Roger Ferguson points out that while the general expectation is for a long-term effect, sometimes market responses can be more immediate.

 


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Fed’s Rate Cut Decision Hinges on Economic Data

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