Are higher rates slowing the economy? A zoo provides clues.

Are higher rates slowing the economy?  A zoo provides clues.

Leesburg Animal Park in Northern Virginia has seen strong business at its Pumpkin Village festival this fall. Even with rainy weekends and soaring admission prices, families are coming out to visit the petting zoo, ride the giant slides and zigzag through the grassy maze.

Park owner Shirley Johnson was worried demand might drop. Headlines throughout the year were warning about an impending recession as the Federal Reserve raised interest rates to slow growth and control inflation. That recession hasn’t happened, but uncertainty and high borrowing costs have hit his investment plans.

“You can’t stick your neck out as far as you can,” he said. The park has halted the expansion of its gibbon pen, a larger project that would have given the playful primates more space, but also would have required taking out a loan.

Park’s experience is an example of a story playing out across the country. More than a year and a half into the Fed’s campaign to cool the economy, higher borrowing costs are clearly hitting business investment and some interest-rate-sensitive sectors, but consumer spending at a much stronger clip than expected. are doing.

Central bankers are keeping an eye on that flexibility. For the time being, they are happy that the labor market and economic growth are holding up while inflation has declined significantly, and this week Fed officials decided to leave interest rates unchanged as they wait to see whether it May continue. But they are also looking for more evidence that their measures are working to rein in the economy.

Fed Chairman Jerome H. Powell said, “Everyone is heartened to see that we have been able to achieve quite significant progress on inflation without seeing the kind of increase in unemployment that is normal.” Wednesday. “The same is true of evolution.”

But he said economic growth, which is driven mainly by consumer spending, would probably need to slow for inflation to fully return to a normal pace. It’s now running at about 3.4 percent, still well above the Fed’s 2 percent target.

“What we do with demand will still be important,” he said.

Surveying the economy shows that the impact of the Fed’s rate moves is pronounced in some places, mixed in others and yet to make much of an impact in other places.

Starting in March last year, the Fed has raised its key rate, which is now set at a range of 5.25 to 5.5 percent. This is above the level that central banks consider necessary to slow the economy over time.

Higher Fed rates have also helped push up long-term borrowing costs in the markets. mortgage rates By about 8 percent, which is more than two decades.

Despite this, growth is much faster than normal, according to economists. The economy expanded at an annual rate of 4.9 percent from July to September Commerce Department informed Last week. This has sparked debate over whether the Fed’s policies are succeeding in cooling things down.

While economists believe higher borrowing costs are having an impact, policymakers are looking at the data to understand whether they are putting enough pressure on the economy to completely control inflation .

“It’s a question of calibration,” former Fed economist William English, now at Yale, said of higher rates. “But are they working? Sure.”

Higher rates impact stock prices: Higher borrowing costs harm investment funds’ attitudes toward corporate profits and high-return interest-bearing securities such as bonds. Its impact is beginning to be seen, although markets have remained volatile.

The S&P 500 fell for three consecutive months from August to October, which coincided with a rise in long-term market rates. Stocks have had a strong start to November as long-term yields have declined in recent days.

Higher rates have increased this value of dollarWhich, among other effects, makes imports cheaper for local buyers and American exports more expensive abroad.

Borrowing more slows down business investment. For example, investment in equipment has been negative three out of the last four Quarters, which may indicate a rate increase at the workplace. Industrial equipment maker Caterpillar spooked investors this week when it reported a shrinking order backlog.

While the Fed’s rate moves have made it more expensive to borrow to buy a home or a car, both of those markets have declined recently — making the effects complicated to see.

Take the cars. They remained in extremely low supply for several months during the pandemic, as supply chain problems collided with strong demand. Supply is back, but there’s now a hole in the used car market Far fewer new cars than usual Sold in 2021 and 2022.

Car buyers have stepped back in recent months, but pent-up demand means sales are up, not down.

“This year has been more resilient than we thought,” said John Lawler, Ford Motor’s chief financial officer. a recent earnings call, He said the price of vehicles now accounts for about 14 percent of a consumer’s monthly disposable income, up from 13 percent before the pandemic, and Ford expects a gradual return to normal over the next 12 to 18 months.

The housing market is even more complex. Housing supply is limited, partly because people who locked in low mortgage rates are now hesitant to sell. In view of the shortage of old houses in the market, sale of existing houses are very lowBut the new house has been sold steady and home prices are rising,

If there’s one place where it’s hard to see a cut in high rates, it’s the consumer sector.

The job market remains stable despite the Fed’s rate changes hitting parts of the economy: Hiring has slowed on average this year compared to last, but remains Quick Much more than what was normal before the pandemic. Wage growth has slowed, but is still faster than the pre-2020 pace.

That has allowed Americans to keep shopping despite rising prices and dwindling government pandemic relief. Spending grew faster in September than economists expected.

If it persists, strong consumption could be a concern for the Fed, as it could lead companies to raise prices to cover their costs or protect profits without losing customers – which could keep inflation rising. Can.

Take the animal park. It has made some medium-sized investments this year, such as improving its camel enclosure. But those projects cost money, and day-to-day operations have become more expensive.

To keep up, businesses raised prices. They canceled the cheap kids tickets to Pumpkin Village. General weekday visits also cost more: $17.95 for adults, up from $15.95 in late 2021, according to the park’s website.

Till now consumers are coming.

“People just want to be outside,” Ms. Johnson said. “It’s good old-fashioned fun.”

Source link

Leave a Comment

Your email address will not be published. Required fields are marked *

+ 13 = 20