Savings and risk management make the economy resilient
Caldwell 24 (Preston Caldwell is senior U.S. economist for Morningstar Research Services LLC. “4 Reasons the Economy Has Been Resilient to Higher Interest Rates” 5/7/2024. Accessed 6/18/2024. https://www.morningstar.com/economy/why-economy-has-been-so-resilient-higher-interest-rates) wtk
The Fed’s largest and fastest rate-hike cycle in 40 years—a 5.25% fed-funds rate increase between March 2022 and July 2023—was widely expected to generate a recession in 2023. Yet, real gross domestic product growth defied expectations by accelerating to 2.5% in 2023 from 1.9% in 2022.
So why has the economy been so resilient to these higher interest rates?
We attribute it to four key factors:
1. Households accumulated excess savings during the pandemic and businesses boosted cash holdings, which are now being spent.
2. Many borrowers are locked into low rates, such as mortgages and corporate bonds, for which the interest burden remains low.
3. Risky asset prices have held firm, meaning that risky premia have compressed.
4. The reduction of risky shadow banking activities (activities outside the traditional banking sector) has rendered the financial system less vulnerable to shocks.