Tighter bank lending standards have not hit the US corporate bond market. The NAHB housing market index climbed again, from 50 in May to 55 this month. Some prospective buyers are accepting a “new normal” for higher rates.
At the aggregate level, the Fed’s hiking cycle is not translating through to higher debt servicing costs for households (as a share of personal disposable income). The rise in interest rates is being countered by ongoing household deleveraging. The rally in consumer discretionary stocks suggests fears of a consumer spending slowdown are overblown. Household net worth as a share of personal disposable income edged down to 759.9% in Q1 but remains well above the pre-pandemic highs (702.2% at the end of 2019).
The impact of the IRA and loose fiscal policy has been underestimated by policymakers. There is a total lack of control on spending, and the ‘debt ceiling negotiations’ were a complete charade that ultimately did nothing to put the public finances on a sustainable trajectory.
There is a high barrier to cutting rates when fiscal policy is so loose and the stock market is rallying too. To be clear, the inflation news has been good. But this does not equate to rate cuts. Real yields have climbed above 1.5%, the economy is still expanding, investment remains resilient and jobs growth is buoyant.
