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How the economy responds to Fed decisions is … complicated

Matt Levin Jan 29, 2025
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This week, Fed Chair Jay Powell announced the Federal Reserve would keep interest rates as-is. Kayla Bartkowski/Getty Images

How the economy responds to Fed decisions is … complicated

Matt Levin Jan 29, 2025
Heard on:
This week, Fed Chair Jay Powell announced the Federal Reserve would keep interest rates as-is. Kayla Bartkowski/Getty Images
HTML EMBED:
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Fiscal policy, tariffs, immigration, deficits — all that stuff goes in the “no control” category for the Federal Reserve. What the Fed does control is monetary policy. Specifically, the federal funds rate.

But how the economy actually responds to that rate, and interest rates generally, well, that’s a little more complicated.

Housing is supposed to be the most interest rate-sensitive sector of all the sectors. So when the Fed cuts interest rates, people expect mortgage rates to also go down. But when the Fed did cut its rate three times over the second half of last year, mortgage rates went up.

“The Fed cut short-term rates by 100 basis points and longer-term rates like mortgage rates went up 100 basis points. You look historically that’s not typically what happens,” said Michael Fratantoni, an economist with the Mortgage Bankers Association.

Housing wasn’t all that sensitive to the Fed partly because mortgage rates are tied to what the federal government pays to borrow money and those rates are going up.

“Global bond investors getting honestly concerned about deficits, debt,” he said.

It’s not just bond vigilantes harshing Jay Powell’s mellow. When the Fed sets rates, it’s really setting the interest rates banks pay to borrow from one another, and those rates ripple through the rest of economy.

But Thomas Urano at Sage Advisory said nowadays, businesses don’t have to go to banks. They can go to private credit or private equity.

“The number of people who are willing to extend loans outside of the banking system, that has seen prolific growth over the last five years,” he said.

Consumers have also proven pretty interest rate-resistant.

Olu Sonola at Fitch Ratings said that since the pandemic, the big spenders are rich enough to avoid borrowing money to buy stuff.

“When you think about the sensitivity of high-income households, and they do the bulk of the spending, not much this time around,” he said.

To be clear, Sonola said the economy overall is still sensitive to the Fed. Just not as sensitive as he thought it was.

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