NEW YORK – The Federal Reserve this year has raised interest rates at the fastest pace since the 1980s, making it increasingly expensive to borrow money as it seeks to slow consumer and business demand and drive inflation lower.

So far, those moves are making more of a splash than a wave.

The Fed has lifted interest rates to nearly 4 per cent this month from just above zero in March, and those moves are clearly rippling through financial markets. The housing market has slowed as mortgage rates have surged, and some specific industries – most notably technology – are feeling the pinch. But other parts of the United States economy, including consumer spending and the labour market, have proved surprisingly resilient to the central bank’s interest rates changes.

Economists are closely watching for any sign that those areas of economic strength are beginning to crack. Some are warning that the slowdown is coming but will simply take time to fully play out, because the interest rate moves already enacted will take months or years to have their entire effect.

Here’s where rate increases are having an effect, where they aren’t and why it matters.

Interest-sensitive sectors are slowing

What is happening in the housing market is clear evidence that the Fed’s moves are having an effect. Mortgages are at their most expensive in 20 years, with borrowing costs on a 30-year fixed-rate loan hovering near 7 per cent. Buyers are giving up as prices remain high and borrowing becomes unaffordable: Pending home sales have swooned, new housing construction has pulled back sharply, and existing home sales have fallen for a record nine straight months.

Some experts in the car industry also expect used-vehicle demand to wane and prices to fall in the coming months, in part because auto loans have become pricier. Pre-owned car prices already declined notably in October inflation data.

Technology companies are also feeling the pain

If there is one industry that shows clear signs of hurting right now, it is technology.

Part of the pullback is tied to the Fed. Technology stock values are premised on future growth and are particularly exposed to Fed rate moves, and many have taken a hit this year. But beyond that, e-commerce soared amid pandemic stay-at-home orders and has now returned to a more normal growth path. Company-specific decisions are also roiling the industry: Meta bet big on virtual reality and Twitter was recently acquired by billionaire Elon Musk.

As tech companies confront challenges and changes, some have announced big layoffs, including Amazon, Meta and Twitter. But tech companies account for just about 2 per cent of the nation’s employment, said Dr Nela Richardson, chief economist at payroll services and data provider ADP. Even substantial firings in the industry would not be enough to meaningfully cool off the broader economy.

“I don’t think tech is indicative of the broader economy,” Dr Richardson said. Plus, a layoff is not a life sentence and opportunities for tech workers are plentiful.

“Some of these workers might be absorbed into other jobs and industries,” she said.

But the labour market is what economists call a lagging indicator. It slows down only when the broader economy has started to turn. If the Fed waits for the job market to pull back notably to stop aggressively adjusting its policy, it may wait too long.

Consumer spending is ‘rocking’

In theory, shoppers should be pulling back as money becomes more expensive to borrow and uncertainty about the future mounts.

But so far, businesses continue to invest and consumers are hardy. Spending cooled earlier this year but has since picked back up, with retail sales jumping in October. Companies including Walmart, Macy’s and Home Depot have reported healthy earnings in recent weeks and are predicting a decent holiday season, even as Target struggles to clear the inventory it amassed earlier this year.

The question is why. Part of it is probably due to strong household balance sheets. Families accumulated US$2.3 trillion (S$3.2 trillion) in extra savings in 2020 and 2021, and were still sitting on about US$1.7 trillion in excess savings by the middle of this year, based on Fed estimates. Although most of that was held by wealthier households, families in the bottom half of the income distribution had US$5,500 in extra savings on average per household.

The strong labour market also means that overall earnings growth – taking into account hours worked, pay gains and jobs added – is rising faster than inflation. This is helping to sustain demand in the economy.

“Consumer spending is rocking right now,” said Mr Neil Dutta, head of US economics at research firm Renaissance Macro, pointing to sustained demand for everything from new cars to Taylor Swift concert tickets.

The risk, he said, is that domestic spending appears to be accelerating and global demand may be on the cusp of snapping back, in part as China eases Covid-19 restrictions. If this surprises retailers who have braced for a recession, it could lead to new inventory shortfalls.

“It is a very potentially problematic situation,” he said.

Inflation may be coming down, but at a fast-enough pace?

This all adds up to a conundrum for the Fed as it decides how high interest rates need to go to restrain demand enough that inflation will quickly come back down to the central bank’s 2 per cent target.

On the one hand, inflation is beginning to slow – prices are still climbing swiftly, but slightly less swiftly than before. This deceleration is expected to continue. Supply chains are healing, and some companies are beginning to pass their lower costs along to consumers. Although soaring rents have pushed up price indexes this year, they are on track to fade next year.

But the question was never whether inflation would come down. Economists always expected that it would. It is how much and how quickly it will drop. With strong demand and a solid labour market, it could be difficult for price increases to swiftly return to the Fed’s target.

Economists at Goldman Sachs estimate that the Fed’s preferred inflation gauge, stripping out food and fuel costs, will slow to 2.9 per cent by next December from 5.1 per cent today. This would be way better, but still be notably too fast. NYTIMES