The $600 billion consumption potential of American consumers comes from locking in low-rate mortgages in advance
The latest analysis from the Swiss Re Institute indicates that due to many American homeowners locking in low-rate mortgages ahead of time, their sensitivity to the Fed's rate hikes has decreased, leading to a weakened impact of rate hikes on consumption. Since 2022, these low-rate mortgages have released approximately $600 billion in additional spending power, accounting for nearly 2% of personal consumption expenditure. This phenomenon may compel the Fed to implement larger rate cuts in the future to stimulate the economy. Furthermore, with the median home price rising by about 60% since early 2020, coupled with credit card delinquency rates higher than pre-pandemic levels, many households are facing increased debt burdens, limiting the relief effects of rate cuts
The Swiss Re Institute pointed out that many homeowners who had previously locked in low-rate mortgages are less affected by monetary policy, and the Federal Reserve may need to cut rates more significantly in the future.
On Monday, August 26th, Eastern Time, the latest analysis from the Swiss Re Institute showed that since 2022, low-rate mortgages have released an additional $600 billion in consumer spending for American consumers, effectively mitigating the impact of Fed rate hikes. Economists Mahir Rasheed and James Finucane from the institute noted that this extra money is equivalent to around 2% of fixed-rate mortgage holders' personal consumption expenditure.
The analysis also indicated that during the recent Fed rate hike cycle, new mortgage rates in the U.S. market were up to 3.2 percentage points higher than the average rates previously locked in by borrowers. This means that many households' debts (such as mortgages) were protected by fixed rates and were not affected by rate hikes, keeping their spending power strong, and the Fed's rate hikes did not transmit to the entire economy.
Therefore, in order to curb overheating in the economy, the Fed may need to raise rates more significantly than originally planned. However, this approach is unfavorable for renters, as they cannot enjoy the low-rate protection like homeowners and will face higher borrowing costs and rents.
At the same time, this situation may also weaken the effectiveness of future Fed rate cuts, especially when stimulating consumer demand becomes more challenging during an economic slowdown. Therefore, the Fed may need to cut rates more significantly in the future to stimulate the economy. Analysts from the institute pointed out:
"This situation may lead to a more significant rate-cutting cycle by the Fed in the next year, beyond current expectations."
It is worth noting that since early 2020, the median house price in the U.S. has risen by about 60%, indicating that buying a house now is much more expensive than before. Meanwhile, credit card delinquency rates are higher than pre-pandemic levels. Both of these factors indicate that the debt burden on many households has increased. Even if the Fed lowers rates, the relief effect may be limited as house prices are already high, and many people are burdened with substantial debt