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The U.S. Economy is Showing Strong Growth Despite High Interest Rates

The U.S. economy remains remarkably resilient, despite a sharp rise in interest rates. Mortgage rates are at their highest level in more than two decades.

More than a year and a half, the Federal Reserve has been trying to put the brakes on inflation with higher interest rates, but the U.S. economy still chugs along. A GDP report out this coming week is expected to show strong economic growth during July, August and September. NPR’s Scott Horsley joins us. Scott, thanks so much for being with us.

SCOTT HORSLEY, BYLINE: Good to be with you.

SIMON: Higher interest rates are supposed to tamp down spending. That hasn’t happened exactly, has it?

HORSLEY: No. Americans have been spending pretty freely. Retail sales last month were up more than expected and easily outpaced inflation. People are spending a lot of money at restaurants, on live entertainment. Retailers had a good back-to-school season. Just looking around my neighborhood, it seems like people shelled out a lot for Halloween decorations. Spending around the Christmas holidays is also projected to be up about 5% from a year ago. Federal Reserve Chairman Jerome Powell told the Economic Club of New York this week the economy has proven to be resilient despite the sharp run-up in interest rates.

(SOUNDBITE OF ARCHIVED RECORDING)

JEROME POWELL: If you think back a year, many forecasts called for the U.S. economy to be in recession this year. Not only has that not happened; growth is now running for this year above its longer-run trend. So that’s been a surprise, driven largely by consumer spending, driven by a very strong job market. And we’ve also had inflation coming down.

HORSLEY: That’s all good news. Unemployment’s been under 4% for 20 months in a row. Wages are now rising faster than prices. So paychecks are stretching farther. The one potential downside, though, is if the economy stays this strong, inflation, which has come down a lot, might stop coming down and plateau somewhere above the Fed’s 2% target. And if that happens, then the central bank might have to push interest rates even higher.

SIMON: But one casualty of rising interest rates is the housing market, isn’t it?

HORSLEY: Yeah. Mortgage rates are way up. Housing sales are way down. Freddie Mac says the average rate on a 30-year home loan now topped 7.6%, and those higher rates are cutting into both supply and demand for housing. You know, they’re hitting supply because most people who already own a home have a mortgage with a much lower interest rate, so they’re reluctant to sell. And then higher rates are also pricing a lot of would-be buyers out of the market. So you got fewer buyers, fewer sellers. Turnover in the housing market last month was the lowest it’s been in more than a dozen years. That said, with so few homes on the market, prices are staying high. The average home is selling in about three weeks, and more than 1 out of 4 sells for more than its asking price. So if you’re heading out to an open house this weekend, good luck.

SIMON: Higher interest rates also contribute to a growing federal deficit. What do we know about that?

HORSLEY: Yeah. The Treasury Department just closed the books on the federal government’s fiscal year, and the annual deficit soared to nearly $1.7 trillion. That’s 23% more red ink than the year before. The government actually spent 2% less this past year than the year before, but tax collections dropped by 9%. So you had a bigger budget gap. And interest payments on that whopping federal debt jumped to a record $879 billion – more than we spend on defense. Powell doesn’t like to kibitz about tax and spending decisions that Congress makes, but he did say this is not a good look.

POWELL: It’s not a secret. We know that we’re on an unsustainable path fiscally. It’s not that the level of the debt is unsustainable. It’s not. It’s that we’re – the path we’re on is unsustainable, and we’ll have to get off that path sooner rather than later.

HORSLEY: For now, though, we’re just running headlong down that path. This week, the white House asked for another $106 billion in spending for Ukraine, Israel, Gaza and things like border security. Whatever the merits of that spending, it does add to the growing pressure on the debt.

SIMON: NPR’s Scott Horsley. Thanks so much.

HORSLEY: You’re welcome.

Source: NPR

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