The past 3 years prove the economy is resilient to inflation and hikes

The Federal Reserve has briskly raised interest rates to rein in red-hot inflation brought on during the pandemic, and investors have been on edge trying to assess the impact of the central bank's efforts.

But through it all, GDP numbers have come in hot, consumer spending has been strong, and the job market is showing few signs of weakening.

For those who are confused about why the economy has been able to weather the swiftest rate hikes in 40 years, Bank of America analysts say it's due to the long period of abnormally low-interest rates following the Great Recession that only ended in March 2022 when the Fed embarked on its inflation fight.

That's also why the outlook for equities isn't as ominous as many forecasters say — rates may feel high, but they're still pretty tame relative to history.

"A key reason for resilience is the relatively slow transmission of interest rate increases to the real economy, as a large share of households and businesses have locked in low borrowing costs and don't yet need to roll over their debt," analysts Aditya Bhave and Mark Cabana wrote in a note published Wednesday.

The Fed kept rates near zero following the 2008 crisis in order to stimulate economic activity. Both households and corporations got used to ultra-low-cost debt, making the current run-up in rates feel more painful.

But many borrowers are still locked into loans they signed when interest rates were low, so they haven't had to take on those higher costs yet.

While the impact of higher rates has yet to be felt fully, the BofA analysts say it won't spark a recession when it does hit.

"Looking ahead, we expect the economy to slow meaningfully in the coming quarters as higher front-end and long-end rates take their toll on credit conditions. However, we think there is enough momentum in the economy to avoid an outright recession." they said.