The US enters a new economic era with Fed interest rate hikes. To control inflation and stabilize the economy, the Federal Reserve raised its benchmark interest rate above 5%. This move signals a return to normal financial conditions, moving away from the era of near-zero interest rates.
Former Fed vice chair Roger Ferguson was surprised by the length of near-zero rates, which few had expected. The extended low interest rate environment resulted from financial crises, prompting policymakers to take drastic measures to revive the economy.
However, these policies had wide-ranging effects on finance and businesses in the country. Investors seeking safe havens faced lower returns, as government bonds, Treasury securities, and savings accounts yielded minimal profit in a low-interest climate. Stocks, homes, and Wall Street firms surged in value due to easy debt access.
With rising interest rates, investment landscape will likely shift. Safer investments may be more appealing, while ventures funded by variable loans may face challenges with rising interest rates. Corporate bankruptcies are increasing in the United States.
EY-Parthenon’s Chief Economist, Gregory Daco, noted that high interest rates may deter unprofitable investments. The paradigm is a big change from the previous scenario where money was almost free, and any investment seemed worthwhile due to low capital costs.
The zero lower-bound policy debate has intensified recently, and with the Fed raising the federal funds rate, there are warnings of prolonged elevated interest rates. Even if inflation eases, policymakers likely to maintain current trajectory.
The outlook on lower interest rates is uncertain, with Mark Hamrick from Bankrate.com saying a return to lower rates is unlikely soon, unless a catastrophic event occurs. As the US navigates the new economic landscape, businesses and individuals brace for a challenging period.