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High Interest Income Is Boosting Spending. Can It Last?

High Interest Income Is Boosting Spending. Can It Last?

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The economy may be slowing, but investors’ returns aren’t. 

Interest rates are high, and in the first quarter of 2024 alone, Americans earned roughly $3.7 trillion in interest and dividend income at a seasonally adjusted annual rate, according to Commerce Department data reviewed by the Wall Street Journal.

The Federal Reserve began raising rates more than two years ago to combat pandemic-era inflation. While the rate of price increases has come down, inflation still isn’t back at the Fed’s target of 2%, and rates have remained high. For investors, this has juiced returns on certain assets, and growing income can lead to growing spending, which in turn is the backbone of the U.S. economy. It’s a dilemma, then, that the Fed will eventually have to cut rates.

Wealth Windfall

In the final quarter of 2023, U.S. household wealth held in assets like stocks and real estate ballooned to $147 trillion, the highest level on record, per Federal Reserve data. Even though the stock market is usually not too keen on high interest rates, other factors, including company earnings and the persistent theme of AI, has allowed the market to steadily march higher, helping those who are invested along the way.

At the same time, real earnings have steadily increased from 2022’s multi-year low, the stock market is hitting all-time highs, and unemployment remains below 4%, near historic lows.

All this has helped consumer spending, particularly for high-income households. And while that’s good news for the broader economy, it also complicates the Federal Reserve’s efforts. With investors more able to absorb price and interest rate increases, there seems to be no rush to cut rates.

Rate Resilience

Higher interest rates typically stifle an economy by slowing the rate of credit creation, dampening company profits, and possibly forcing consumers to redirect discretionary spending.  

Certainly, many Americans are feeling this pinch, particularly lower-income households carrying credit card debt or small businesses with loans. And that’s just it. The economy isn’t just high-income households who are invested in the stock market, nor is it only small family-owned businesses struggling with the high cost of credit. The economy has a bit of everything, and the Fed has to weigh just that.

The longer rates are elevated, the more borrowers will be forced to refinance at high rates, which may weigh on their spending

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